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The State Treasurer’s
Annual Report
To The People of North Carolina
North Carolina
Department of State Treasurer
Fiscal Year 2001-2002
325 North Salisbury Street
Raleigh, North Carolina 27603-1385
1
To the People of North Carolina:
It is with pleasure that I submit to you the 2001-02 Annual Report for the
Department of the State Treasurer. I hope you find this useful in developing a
deeper understanding of the Department.
As the 13th popularly elected State Treasurer (and only the 3rd in 51 years), it is
both a great honor and a challenge to follow a long line of respected public servants
who have held this office. While the Department’s duties are varied and complex, our
mission is simple –preserving and protecting the fiscal integrity of our great State.
The Department of the State Treasurer is committed to maintaining North
Carolina’s hard-earned reputation for credit worthiness and continuing a
conservative and prudent investment strategy for the $62 billion in public funds
entrusted to us. So long as we maintain this commitment we will continue the
tradition of making sure that “good government is indeed a habit.”
With the help of wonderful colleagues, I look forward to continuing to serve the
people of North Carolina.
This report is available on our website www.nctreasurer.com and on disk. Please
call (919) 508-5176 or write the Department to request a copy.
Sincerely,
Richard H. Moore
North Carolina
Department of State Treasurer
RICHARD H. MOORE 325 NORTH SALISBURY STREET
STATE TREASURER RALEIGH, NORTH CAROLINA 27603-1385
Fax: (919) 508-5167 Phone: (919) 508-5176 website: www.treasurer.state.nc.us
The Department of State Treasurer includes Local Government Commission Teachers’ and State Employees’ Retirement System, Local Governmental Employees’
Retirement System, Public Employees’ Social Security Agency. Legislative Retirement Fund, Escheats Fund, and Tax Review Board.
An Affirmative Action/Equal Opportunity Employer
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Table of Contents
LETTER OF TRANSMITTAL ............................................................................................................................................... 1
TABLE OF CONTENTS ......................................................................................................................................................... 2
STATE TREASURER
Table of Organization........................................................................................................................................................ 4
RETIREMENT SYSTEMS DIVISION
Operational Highlights ....................................................................................................................................................... 5
The Basic Functions .......................................................................................................................................................... 6
General Administration................................................................................................................................................. 6
Benefits Processing Section........................................................................................................................................ 6
Accounting/Data Control Section................................................................................................................................ 7
Retirees' Health Insurance..................................................................................................................................... 7
Direct Deposit Accounts/Address Changes.......................................................................................................... 7
Batch Posting and Systems Transfers .................................................................................................................. 7
Error Checking.......................................................................................................................................................... 7
Member Services Section............................................................................................................................................ 7
Records Section............................................................................................................................................................ 7
Significant Accomplishments
Legislation....................................................................................................................................................................... 8
Communications ............................................................................................................................................................ 9
Functional ....................................................................................................................................................................... 9
The Retirement Systems and Trust Funds
Actuarial Valuation........................................................................................................................................................ 10
Actuarial Assumptions .................................................................................................................................................. 10
Funding of the Systems................................................................................................................................................ 10
Funded Status................................................................................................................................................................ 11
Funded Ratio of the Retirement Systems .................................................................................................................. 11
Teachers' and State Employees' Retirement System of North Carolina............................................................... 12
Local Governmental Employees' Retirement System of North Carolina............................................................... 13
Consolidated Judicial Retirement System of North Carolina.................................................................................. 14
Teachers' and State Employees' Benefit Trust.......................................................................................................... 15
Firemen's and Rescue Squad Workers' Pension Fund........................................................................................... 16
Retirees' Health Premiums Fund................................................................................................................................ 16
Legislative Retirement Fund........................................................................................................................................ 17
Legislative Retirement System.................................................................................................................................... 17
Disability Income Plan.................................................................................................................................................. 17
Public Employees' Social Security Agency................................................................................................................ 17
National Guard Pension Plan...................................................................................................................................... 18
Supplemental Retirement Income Plan of North Carolina....................................................................................... 18
Registers of Deeds' Supplemental Pension Fund.................................................................................................... 18
STATE AND LOCAL GOVERNMENT FINANCE DIVISION
Operational Highlights ....................................................................................................................................................... 19
The State of Tax-Exempt Financing............................................................................................................................... 20
The Basic Functions
Debt Management......................................................................................................................................................... 21
Fiscal Management....................................................................................................................................................... 22
Significant Accomplishments
Debt Management......................................................................................................................................................... 23
North Carolina General Obligation Bonds............................................................................................................. 23
Installment and Lease Purchase Agreements ..................................................................................................... 23
Revenue Bonds ........................................................................................................................................................ 23
North Carolina Medical Care Commission Bonds ............................................................................................... 23
North Carolina Housing Finance Agency.............................................................................................................. 23
Industrial Revenue Bonds....................................................................................................................................... 24
Volume Cap Allocation............................................................................................................................................ 24
"Triple-A" General Obligation Bond Ratings ......................................................................................................... 24
North Carolina Educational Facilities Finance Agency....................................................................................... 24
North Carolina Clean Water Revolving Loan and Grant Funds ........................................................................ 25
Fiscal Management....................................................................................................................................................... 28
The North Carolina Capital Management Trust................................................................................................... 28
Review of Semi-annual Reports of Deposits and Investments ......................................................................... 28
Financial Section of Bond Offering Statements ................................................................................................... 28
Analysis of Official Pronouncements ..................................................................................................................... 28
State Treasurer’s conference on Local Government, Auditing and Financial Management
and Other Continuing Education Courses and Conferences ....................................................................... 28
Monitoring Compliance with “Yellow Book” Requirements ................................................................................ 29
3
Audit Manual for Governmental Auditors.............................................................................................................. 29
Audit Review Process ............................................................................................................................................. 29
Memoranda and Other Publications ...................................................................................................................... 29
State Treasurer's Governmental Accounting/Financial Management Awards Program ............................... 30
Monitoring Compliance with New Economic Development Laws ..................................................................... 30
Arbitrage Requirements for State Bonds .............................................................................................................. 30
Financial Reporting of Public School Expenditures............................................................................................. 30
Municipal Electric Systems..................................................................................................................................... 30
Monitoring Revenue Bond Compliance................................................................................................................. 31
Adherence to Continuing Disclosure Requirements of The Securities and Exchange Commission.......... 31
White Goods Disposal Tax..................................................................................................................................... 31
Compliance Supplements for Local Government Auditors ................................................................................ 31
Electronic Submission of the Report of Investments and Deposits.................................................................. 31
County and Municipal Information Website.......................................................................................................... 31
Projects in Progress
Internet Website............................................................................................................................................................. 31
The Town of East Spencer.......................................................................................................................................... 32
Monitoring the Impact of the State Budge Upon Cities and Counties ................................................................... 32
Policies Manual Update................................................................................................................................................ 32
Charter Schools ............................................................................................................................................................. 32
New Financial Reporting Model.................................................................................................................................. 32
Local Government Commission Expanded Oversight............................................................................................. 33
Qualified Zone Academy Bonds Authorized.............................................................................................................. 33
INVESTMENT MANAGEMENT DIVISION
Operational Highlights ....................................................................................................................................................... 34
Investment Management
Serving as the State's Chief Investment Officer........................................................................................................ 35
General Investment Objectives.............................................................................................................................. 35
Operating Policy....................................................................................................................................................... 35
The State Treasurer’s Investment Pool...................................................................................................................... 36
Cash Management Program ....................................................................................................................................... 37
Short-term Investment Portfolio............................................................................................................................. 38
Bond Proceeds Investment Pool........................................................................................................................... 40
Trust Funds Investment Program ............................................................................................................................... 40
Equity Investment Portfolio..................................................................................................................................... 41
Long-term Investment Portfolio.............................................................................................................................. 43
Real Estate Investment Portfolio ............................................................................................................................ 45
Alternative Investment Portfolio............................................................................................................................. 47
FINANCIAL OPERATIONS DIVISION
Banking Operations
Receiving State Moneys............................................................................................................................................... 50
Disbursing State Moneys ............................................................................................................................................. 51
Specialized Banking Functions ................................................................................................................................... 51
Bank Reconciliation Unit.............................................................................................................................................. 51
Statewide Operations ................................................................................................................................................... 51
Investment Accounting............................................................................................................................................ 51
Retirement and Escheat Fund Accounting........................................................................................................... 51
Departmental Operations ............................................................................................................................................. 51
ADMINISTRATIVE SERVICES DIVISION
Operational Highlights ....................................................................................................................................................... 52
Departmental Services ...................................................................................................................................................... 52
Personnel Management............................................................................................................................................... 52
Unclaimed Property Program........................................................................................................................................... 53
STATISTICAL TABLES — TABLE OF CONTENTS ........................................................................................................ A-1
4
North Carolina Department of State Treasurer
Table of Organization
Richard H. Moore
Treasurer
Joseph Stewart
Chief of Staff
Investment
Division
Andrew Silton
Deputy Treasurer
and Director
Financial
Operations Division
Mike Barham
Deputy Treasurer
and Director
State and Local
Government
Finance Division
Robert M. High
Deputy Treasurer
and Director
Administrative
Services Division
Kenneth C. Wilkins
Deputy Treasurer
and Director
Retirement
Systems Division
Michael Williamson
Deputy Treasurer and
Director
Information
Technology Division
Bill Golden
Deputy Treasurer and
Director
5
Retirement Systems
Division
The Retirement Systems Division of the
Department of State Treasurer administers the
statutory retirement and fringe benefit plans, as
authorized by the General Assembly of North Carolina,
which cover the State’s public employees. The
administration of the several retirement systems
requires a high level of fiduciary responsibility for the
employees’ trust funds with prudent, honest and
efficient use of employees’ and taxpayers’
contributions. The public purpose of the existence of
retirement systems and benefit plans is to recruit and
retain competent employees for a career in public
service, by providing a replacement income for
retirement, disability, or at death for an employee’s
survivors. The organizational structure herein shows
the functional arrangement of the tasks performed in
this Division.
Operational Highlights
· Presented recommendations and draft
legisl ation to the 2002 Session of the General
Assembly which resulted in the enactment of
laws to:
— provide cost -of-living adjustments equal to
1.4% to retirees of the Teachers’ and State
Employees’ Retirement System,
Consolidated Judicial Retirement System,
Legislative Retirement System and Local
Governmental Employees’ Retirement
System;
— increase the defined benefit accrual rate
from 1.81% to 1.82% in the Teachers’ and
State Employees’ Retirement System and
the Local Governmental Employees’
Retirement System with a corresponding
benefit adjustment to retirees equal to 0.6%;
— allow retired members of the Teachers’ and
State Employees’ Retirement System to be
reemployed to teach in public schools
without earnings restrictions until July 1,
2004 under certain circumstances;
— modify reemployment earnings restrictions
in the Teachers’ and State Employees’
Retirement System and Local Governmental
Employees’ Retirement System during the
12-month period immediately following the
effective date of retirement;
— amend the retirement statutes to conform to
provisions of the Economic Growth and Tax
Relief Reconciliation Act of 2001; as a result
of this legislation, effective January 1, 2003,
pre-tax money from an eligible retirement
plan or IRA may be accepted to purchase
creditable service;
— amend withdrawn service purchase
provisions in the Local Governmental
Employees’ Retirement System for
purchases on and after January 1, 2003;
— increase the monthly benefit payment to
beneficiaries of the Firemen’s and Rescue
Squad Workers’ Pension Fund from $151.00
to $156.00 per month.
· Processed benefits for 10,261 new retirees.
· Processed refunds for 19,823 former employees.
· Established approximately 48,072 new active
member accounts.
· Increased utilization of direct deposit of monthly
benefit payments from 139,000 to approximately
147,000 retirees.
· Continued the development and testing of the
Disability Automation System. This project is
ongoing.
· Remodeled the Accounting, Benefits and
Records Sections with new carpet, paint, and
work stations.
· Installed new computers for each employee.
· Updated the Retirement Systems Division
Section of the State Treasurer’s Web page
(www.treasurer.state.nc.us) to include the most
currently revised editions of retirement forms,
handbooks, and the Frequently Asked
Questions.
· Added a map and directions to Retirement
System offices to Web page.
· Added a Legislation Highlights summary to Hot
Topics section on the Web page.
· Completed installation of new electronic
document management system (imaging
system) in June, 2002.
Board of
Trustees
Michael Williamson
Director
Actuary
Deputy
Director
Deputy
Director
Research
and
Planning
Member
Services
Section
Benefits
Processing
Section
Accounting
Data Control
Section
Fire and
Rescue
Benefits
Records
Section
Policy
Director
External
Relations
Director
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The Basic Functions
The retirement systems administered by this
Division are the:
• Teachers’ and State Employees’ Retirement System
• Local Governmental Employees’ Retirement System
• Consolidated Judicial Retirement System
• Legislative Retirement System
The systems are governed by two boards of
trustees. The State Treasurer is ex-officio chairman of
each board. The board of the Teachers’ and State
Employees’ Retirement System is composed of 14
members, including actively working employees,
retirees and public members. The Local Governmental
Employees’ Retirement System Board, while legally
separate, is composed of the same 14 members plus 3
members representing local governments. The Board
of Trustees of the Teachers’ and State Employees’
Retirement System is the governing board of the
Consolidated Judicial and Legislative Retirement
Systems and all of the other programs listed herein,
except for the Firemen’s and Rescue Squad Workers’
Pension Fund. That fund is governed by a board of
trustees, of which the State Treasurer is ex-officio
chairman, and is composed of six members, including
actively working employees, volunteers, and a public
member.
In addition to the retirement systems administered
through this Division, responsibility for administration of
other programs covers the:
• Firemen’s and Rescue Squad Workers’ Pension
Fund
• Public Employees’ Social Security Agency
• Disability Income Plan
• Legislative Retirement Fund
• National Guard Pension Plan
• Teachers’ and State Employees’ Benefit Trust
• Supplemental Retirement Income Plan
• Registers of Deeds’ Supplemental Pension Fund
• Contributory Death Benefit for Retired Members
All retirement systems and other programs
administered by this Division are operated on a
calendar year basis from January 1 to December 31,
rather than the State’s fiscal year, except for the
Firemen’s and Rescue Squad Workers’ Pension Fund.
For this reason, much of the data shown for the
Division is for the captioned year ending December 31.
The administrative expenses of the Division for the
retirement systems are paid from the General Fund of
the State. These costs are reimbursed monthly to the
General Fund from the assets of each trust fund
benefited, in proportion to the estimated benefit
received.
General Administration
The Director and his immediate staff are
responsible for the overall general operation of the
Division, and carry out the policies and directives of the
State Treasurer and the governing boards. They
provide assistance to legislators and committees of the
General Assembly, including the drafting of proposed
legislation and the acquisition of actuarial notes for
introduced bills; response to news media inquiries;
action and administrative appeals by individual
members of the retirement systems; a working
relationship with associations and organizations of
employees and employers; and information to State
departments, agencies, institutions, and local
governments. The staff provides assistance to local
governments for Social Security coverage and acts as
liaison between the State and the Social Security
Administration. The staff also performs planning and
research functions, and directs special projects.
Benefits Processing Section
This Section is responsible for the determination of
eligibility for monthly retirement allowances and
processing payment of all benefits for all retirement
systems governed by the boards of trustees and
administered by this Department. Responsibilities
include the calculation and processing of payments of
all retirement allowances under the various systems.
For the period July 2001 through June 2002, 10,261
retirements were processed for payment.
The administration and determination of disability
benefits through the System’s Medical Board under the
provisions of the Disability Income Plan for teachers
and State employees, and the determination of
eligibility for disability benefits from the other retirement
systems are incumbent upon this Section.
Approximately 5,172 disability claims were reviewed by
the Medical Review Board during the 2001-2002 fiscal
year. Responsibilities include the calculation and
payment of monthly disability benefits as well as the
calculation and payment of reimbursements for short -
term disability benefits paid by the various employers
under the provisions of the Plan. Reimbursements
numbering 273 were issued from July 2001 through
June 2002 totaling $1,966,410.
The various death benefit programs related to the
Retirement Systems and the Separate Insurance
Benefits Fund are managed by this Section.
Responsibilities include the calculation and payment of
7
death benefits, return of members’ contributions,
survivor’s alternate benefits, and other lump sum
payments. Beneficiary changes for deceased retired
members who selected an optional payment plan at
retirement that provides for a beneficiary after the
death of the member are handled in this Section.
Approximately 6,505 death reports were received and
processed during this period.
This Section is also responsible for the calculation
and the payment of returns of accumulated
contributions to terminated employees. A total of
19,823 refunds were processed for the period July
2001 through June 2002.
The calculation of service purchase costs under
the provisions of the various retirement systems
administered by the Division is performed by this
Section. In excess of 11,233 cost calculations were
generated by the Benefits Processing Section for the
period July 2001 through June 2002.
Accounting/Data Control Section
Maintaining the accounting records for the retirement
systems is the responsibility of this Section. Another
major responsibility is receiving and processing payroll
contribution reports from some 1,600 participating
State and local units of government. Contribution
information from these payroll reports is electronically
posted to the individual accounts for more than
415,000 members.
This Section is responsible for the administration of
the Contributory Death Benefit Plan for Retired
Members including the notification of eligibility under
the Plan, enrollment of members electing coverage,
and collection of the required contributions.
Brief descriptions of the other functions performed
by this Section are as follows:
• Retirees’ Health Insurance — Duties pertaining
to this program include the receipt and processing
of enrollment applications, and coverage change
requests for more than 110,000 retirees.
• Direct Deposit Accounts/Address Changes —
Activities involved in these areas relate to the receipt
and processing of Electronic Funds Transfer (EFT)
account applications, and changes to direct
deposit accounts. Approximately 147,000 retirees’
benefits are processed through EFT. Also, over
9,000 address change requests for retirees were
processed in this Section.
• Batch Posting and Systems Transfers —These
duties consist of the deposit and recording of
special member contributions, and transfer of
funds between systems.
• Error Checking — The correction of errors
detected by computer edit in the processing of
employers’ payroll reports is an important function
of the Section. Over 47,000 errors were detected
and corrected this past year.
Member Services Section
This Section handles written correspondence,
telephone communications, and e-mail inquiries with
members and employers participating in the retirement
systems and other benefit programs, responding to a
multitude of questions about fringe benefits.
Accordingly, during the past year approximately 42,964
letters were written in this Section, approximately
13,206 e-mail inquiries were addressed, and
approximately 312,132 telephone communications
were handled by personal contact with an additional
52,350 handled by the Interactive Voice Response Unit
(IVR Unit). In addition, annual pre-retirement planning
seminars are conducted by the staff of this Section, as
well as retirement and fringe benefit conferences at the
request of employers, and employee associations. All
visitors to the Division requiring individual counseling
about their benefits are referred to this Section. More
than 9,817 persons were interviewed during the past
12 months.
The calculation of monthly retirement benefit
estimates for future retirees is also a duty of this
Section. Responsibilities include service and salary
projections to an anticipated date of retirement.
Another important function of this Section is
coordinating the participation of local government
employers electing to become members of the Local
Governmental Employees’ Retirement System. This
involves meetings with local governing bodies,
collecting data for transmission to the Systems’
consulting actuary, enrollment of eligible employees
and explanation of monthly reporting procedures.
Ancillary to this function is assistance to local
governments in the adoption of tax shelter and death
benefit coverage agreements. During the past year, 5
local government employers elected to become
participants, and cons equently their employees were
enrolled in the Local Governmental Employees’
Retirement System.
Records Section
The Records Section is primarily responsible for
the creation, maintenance and storage of files for
individuals who are currently, or have been at one
time, members of any of the State-administered
retirement systems.
The Records Section currently maintains
approximately 1,216,618 records. These records,
8
heretofore, had been maintained in the form of
jacketed microfiche and stored in seven power file
cabinets in the Records Section.
The records retention and storage functions have
completely changed since January 1, 1996, with the
implementation of the Division’s electronic document
management system (imaging system). All active and
retired member jacketed microfiche records have been
converted to the imaging system, while all new records
plus updates to existing files are now automatically
processed as digital images. Over 12.3 million images
have been converted to the imaging system.
The Division completed installation of a new
imaging system with advanced capabilities in June,
2002.
Significant Accomplishments
Legislation
Prior to the convening of the 2002 Session of the
General Assembly, the Director and staff identified all
proposals for benefit enhancements and changes
recommended by the various associations of
educators, employees and retirees. Also identified
were measures to enhance administrative ability. Cost
estimates for the recommendations were acquired from
the Division’s consulting actuary. The staff then
assisted the State Treasurer and the Retirement
Systems’ Boards of Trustees in the formulation of their
legislative recommendations.
During the 2002 Session, the Director and staff
provided technical assistance and bill drafting services
for the standing Senate and House Committees on
Pensions and Retirement and communicated the
Boards of Trustees’ recommendations. The staff also
acquired, as provided by State law, 38 actuarial notes
disclosing the fiscal impact of every bill introduced
which affected a State-administered retirement system
or pension plan.
Recommendations of benefits and administrative
enhancements by the board of trustees which were
acted upon favorably by the General Assembly were
to: (1) provide, effective July 1, 2002, in the Teachers’
and State Employees’ Retirement System, a 1.4%
post-retirement increase in the allowances of
beneficiaries in receipt of allowances on and before
July 1, 2001, and for beneficiaries who commenced
retirement with effective dates of August 1, 2001 to
June 1, 2002, a prorated portion of the 1.4% post-retirement
increase in their allowances based on the
number of months a retirement allowance was paid; (2)
provide, effective July 1, 2002, in the Local
Governmental Employees’ Retirement System, a 1.4%
post-retirement increase in the allowances of
beneficiaries in receipt of allowances on and before
July 1, 2001, and for beneficiaries who commenced
retirement with effective dates of August 1, 2001 to
June 1, 2002, a prorated portion of the 1.4% post-retirement
increase in their allowances based on the
number of months a retirement allowance was paid; (3)
provide, effective July 1, 2002, in the Consolidated
Judicial Retirement System, a 1.4% post-retirement
increase in the allowances of beneficiaries in receipt of
allowances on and before July 1, 2001, and for
beneficiaries who commenced retirement with effective
dates of August 1, 2001 to June 1, 2002, a prorated
portion of the 1.4% post-retirement increase in their
allowances based on the number of months a
retirement allowance was paid; (4) provide effective
July 1, 2002, in the Legislative Retirement System, a
1.4% post-retirement increase in the allowances of
beneficiaries in receipt of allowances on and before
January 1, 2002, and for beneficiaries who
commenced retirement with effective dates of February
1, 2002 to June 1, 2002, a prorated portion of the 1.4%
post-retirement increase in their allowances based on
the number of months a retirement allowance was
paid; (5) increase, effective July 1, 2002, the defined
benefit formula accrual rate in the Teachers’ and State
Employees’ Retirement System from 1.81% to 1.82%
of a member’s average final compensation multiplied
by a member’s creditable service for service and early
retirements; (6) provide for an adjustment, on account
of the above defined benefit formula increase, to or on
account of beneficiaries on the Teachers’ and State
Employees’ Retirement System retirement roll as of
June 1, 2002, equal to 0.6% of their June allowances;
(7) increase, effective July 1, 2002, the defined benefit
formula accrual rate in the Local Governmental
Employees’ Retirement System from 1.81% to 1.82%
of a member’s average final compensation multiplied
by a member’s creditable service for service and early
retirements; (8) provide for an adjustment, on account
of the above defined benefit formula increase, to or on
account of beneficiaries on the Local Governmental
Employees’ Retirement System retirement roll as of
June 1, 2002, equal to 0.6% of their June allowances;
(9) permit retired members of the Teachers’ and State
Employees’ Retirement System to be reemployed to
teach in public schools without earnings restrictions.
This provision is effective until July 1, 2004 and applies
only to members who have been retired at least 6
months and have not been employed in any capacity,
except as a substitute teacher or part-time tutor, with a
public school for at least 6 months immediately
preceding the effective date of re-employment; (10)
amend, effective January 1, 2003, withdrawn service
purchase provisions in the Local Governmental
Employees’ Retirement System, to provide that after
five years of membership service, the service credit
under the withdrawn account may be restored upon
repayment of the amount withdrawn plus interest at the
rate of 6½% compounded annually from the year of
withdrawal to the year of repayment, plus a $25.00
administrative fee; and (11) amend the retirement
statutes to conform to provisions of the Economic
Growth and Tax Relief Reconciliation Act of 2001; as a
9
result of this legislation, effective January 1, 2003, pre-tax
money from an eligible retirement plan or IRA may
be accepted via rollover or in-service plan-to-plan
transfer to purchase creditable service in the Teachers’
and State Employees’ Retirement System, Local
Governmental Employees’ Retirement System,
Consolidated Judicial Retirement System, and
Legislative Retirement System.
The cost of these amendments in the affected
retirement systems was funded by the gains realized
from favorable investment and actuarial experience of
each.
Communications
The Research and Planning Officer, in conjunction
with other staff, revised forms for purposes of: notice of
enrollment in the Consolidated Judicial Retirement
System, election of benefits in the Consolidated
Judicial Retirement System, election of benefits in the
Legislative Retirement System, purchase of withdrawn
service in the Teachers’ and State Employees’
Retirement System, application for retirement, retired
group health insurance enrollment, and medical report
for disability benefits. The “Things Retirees Need to
Know” pamphlet was also updated.
Seven brochures describing the plan provisions of
the Teachers’ and State Employees’ Retirement
System, Local Governmental Employees’ Retirement
System, Consolidated Judicial Retirement System, the
Firemen’s and Rescue Squad Workers’ Pension Fund,
and Legislative Retirement System were revised in
January, 2002 and updated on the Web page.
In addition, a Legislation Highlights summary was
added to the Hot Topics section on the Web page, and
a map and directions to the Retirement System office
was added to the Web page.
Subsequent to adjournment of the General
Assembly, a digest of all legislative changes was
provided to all employing units, including some 1,800
fire departments and rescue squad units, and various
employee associations. In addition, Divisional staff
contributed various articles which were published in the
publications of the State Employees’ Association, the
Retired Governmental Employees’ Association, and
other organizations.
The staff of the Member Services Section
periodically works with the staff of the State Agency for
Public Telecommunications in revising the video
programs utilized by the State and Local retirement
systems. These programs, which can be used by
anyone to explain the basic benefits structure of those
retirement systems, are especially suited to the
informational requirements of members nearing
retirement age. Videos are used in the Division’s
statewide pre-retirement counseling meetings which
are publicized throughout the State by the press, radio,
and television. In the spring of 2002, the Member
Services staff conducted 10 pre-retirement meetings
statewide with some 3,570 members in attendance. In
addition, the staff also participated in 93 other
meetings, seminars, benefit fairs, and conferences
relating to retirement benefits, including PREPARE
workshops with 8,746 attendees.
The PREPARE workshop program was a joint
venture with the Office of State Personnel and the
community college system. This program covered
legal, health, financial, housing, and family aspects of
retirement.
Functional
The Division has continued to promote direct
deposit of monthly benefit payments. Between July 1,
2001 and June 30, 2002, the benefit payments of
7,039 retirees were added to the direct deposit group,
bringing the total number of monthly payments made
by direct deposit to 146,921. This means that about
90% of the monthly benefit payments made by the
Department are on direct deposit. The annualized
savings to the State, relative only to the benefit
payments placed on direct deposit during the twelve-month
period ended June 30, 2002, is estimated to be
approximately $25,000.
The Firemen’s and Rescue Squad Workers’
Pension Fund implement ed a new system to allow
volunteer fire departments to submit their rosters of
members electronically.
In the Local Governmental Employees’ Retirement
System, 5 local governments elected to become
participating employers with the System. The
participation of these employers involved the staff of
the Member Services Section in meeting with their
governing bodies and employees, acquiring
prevaluations from the consulting actuary to determine
an employer’s contribution rate, and providing all legal
documents and agreements for their execution.
During this past year progress continued in the
enhancement of computer programs utilized by the
Benefits Processing System to provide timely and
accurate service to the membership of the Retirement
System.
· Continued the development and testing of the
Disability Automation System. This project is
ongoing.
· Began converting Excel spreadsheets that were
serving as databases to actual databases, thereby
providing for multiple simultaneous updates and
user access. This project is ongoing.
Each of the foregoing were important steps in the
Division’s ultimate goal of automating, to the greatest
possible extent, all activities relating to the processing
and payment of benefits.
10
The Division continued the conversion of member
withdrawn account records that were on microfilm to
digital images.
The enrollment of members function and the
change of beneficiaries function now being processed
as digital images in the electronic document
management system have been further refined so as
to permit faster processing. The Division installed a
new electronic document management system
(imaging system) with advanced capabilities in June,
2002.
Implementation of the new imaging system is not
the final step in the automation process for the
Department. Additional initiatives, such as optical
character recognition and bar coding will allow
information to be read by the imaging system from
paper. Payroll history and other historical information
may eventually be stored on the imaging system in
order to provide faster access. The new system is
flexible and expandable such that new users and
applications may be added. To date, most of the
various retirement processes have been incorporated
in automated workflows.
The office receives numerous ve rbal and written
requests for information, from both attorneys and the
general public, as to how the retirement law impacts
individual members and their spouses with respect to
the equitable distribution of their retirement income.
Attorneys are required to submit proposed Domestic
Relations Orders to the Retirement System for review
by the Attorney General’s office before any payment of
retirement income can be made to a member’s ex -
spouse in a divorce situation. The office continues to
process these requests on a timely basis, thereby
providing financial certainty to all parties involved.
The Lotus program that handles equitable
distribution affidavits has a real and direct benefit to the
members and their ex-spouses by providing them up to
the minute information as to the status of a member’s
account and the financial consequences of a divorce
action, thus assisting them and the courts in
determining the fair and equitable distribution of a
member’s retirement income.
The Retirement Systems and Trust Funds
Actuarial Valuation
The actuarial valuation is prepared by an actuary
to assess the funding progress of a retirement system
and the adequacy of the contribution rates which have
been established to fund the system. An actuarial
valuation is an inventory of the assets and liabilities of
a retirement system at a specific point in time.
Information collected covers all of the active (both in-service
and terminated) members and all of the retired
members and other beneficiaries who are receiving
benefit payments. In this way, everyone who has been
promised a benefit from the system is included in the
actuarial calculations to determine the present value of
the system’s liabilities. These liabilities are then
compared to the system’s assets, and calculations are
made to determine whether the contribution rates will
be adequate to fund the uncovered liabilities in the time
period originally established. Annual valuations are
made to permit gradual changes in the contribution
level and/or funding period and keep the funding on a
proper course. The annual valuation is also used by
the actuary to compare actual separation,
compensation, and investment experience with the
actuarial assumptions used in the valuation of the
liabilities of the system. The actuarial valuation balance
sheets for each retirement system are included with
the tables.
Actuarial Assumptions
The economic assumptions used for the actuarial
valuation of all retirement systems are an interest rate
of 7.25% per year and average rates of salary increase
of about 6.00% per year, varying at different ages. The
assumed rates for mortality, withdrawals, disabilities,
and service retirements are based on actual past
experience. The asset valuation method is based on a
modified market related value.
Funding of the Systems
The retirement systems described in this report,
except the Legislative Retirement System, are being
funded on a full actuarial reserve basis and use the
entry age normal cost method as the actuarial cost
approach. Under the entry age normal cost method,
the normal contribution percentage rate is calculated
on the basis of the adopted actuarial assumptions as
the level percentage of the compensation of the
average new member which, if contributed throughout
the entire period of active service, would be sufficient,
together with his/her contributions, to support all the
benefits payable on his/her account. The accrued
liability is the difference between total liabilities and the
present value of future normal cost contributions and
the members’ future contributions. All experience gains
and losses are reflected in the amount of the unfunded
accrued liability and thereby affect the period of
liquidation, except in the Local Governmental
Employees’ Retirement System, where they are reflected
in the normal contribution rate. The Legislative
Retirement System is also being funded on a full
actuarial reserve basis, but uses the projected unit
credit cost method with unfunded accrued liability as
the actuarial cost approach.
11
All retirement systems are joint contributory,
defined benefit plans with contributions made by both
employees and employers. Each active member
contributes 6% of his/her compensation for creditable
service by monthly payroll deduction. The only
exception to this member contribution rate is the
Legislative Retirement System to which each active
member contributes 7% of his/her compensation.
Employers make monthly contributions based on a
percentage rate of the members’ compensation for the
month. Employer contribution rates are actuarially
calculated.
Funded Status
The consistent use of conservative actuarial
assumptions and an approved actuarial cost method
over the years since the establishment of the
retirement systems, and the recognition of all promised
benefits in the actuarial liabilities, have resulted in
retirement systems which can be labeled as
“actuarially sound.” A simple measure for determining
the funded status of a system is to relate the total
present assets to total accrued liabilities to determine a
funded ratio.
The total accrued liabilities are found by adding the
assets and the unfunded accrued liabilities. For
purposes of comparison, the funded ratios for the
major retirement systems are graphically illustrated in
Chart 1. When the ratio equals 100%, a system is
considered to be “fully funded” on a current basis.
Chart 1
Funded Ratio
of the Retirement Systems
98.9% 99.4%
106.4% 112.8% 111.6%
99.1% 99.2% 99.2% 99.3% 99.3%
104.3%
100.3%
107.6% 108.4% 108.9%
0
10
20
30
40
50
60
70
80
90
100
1997 1998 1999 2000 2001
Teachers' and State
Employees'
Retirement System
Local Governmental
Employees'
Retirement System
Consolidated
Judicial
Retirement System
1998
1997
1998 1999 2000 2001 1997 1998 1999 2000 2001
12
Teachers’ and State Employees’ Retirement
System of North Carolina (State System)
N.C.G.S. 135-1 Through 135-18.5
The Teachers’ and State Employees’ Retirement
System has the largest assets and membership of the
retirement systems administered by the Division.
Created by the General Assembly effective July 1,
1941, the State System provides benefits to all full-time
teachers and State employees in all public school
systems, universities, departments, institutions, and
agencies of the State.
This System began operations with a membership
of 42,878 teachers and State employees, and with
appropriations from the State of $1,838,000. The
membership has grown over the years in proportion to
the growth in size and complexity of the public schools
and State government. The active membership at
December 31, 2001 was 349,340, and in addition there
were 112,482 retired members and beneficiaries of
deceased retired members. Invested assets at market
value amounted to about $44.0 billion.
The distribution of the investments of the assets of
the State System as of December 31, 2001 was:
Long-Term Fixed Income
Investment Fund $18,413,935,278
Short-Term Fixed Income
Investment Fund 155,690,328
Real Estate Investment Fund 1,237,620,739
Equity Investment Fund 24,148,376,315
Venture Capital 70,507,495
Total $44,026,130,155
Operations of the State System during the calendar
year 2001 resulted in total receipts of $(7,788,463) and
total expenditures of $1,852,139,484. Chart 2 presents
the distribution of revenues by source and expenditures
by purpose.
The latest Actuary’s Valuation Balance Sheet for
the State System, as of December 31, 2001, is shown
in Table 11. Based on the latest actuary’s report, the
General Assembly set the employer contribution rate at
1.97% of covered payroll, effective July 1, 2001, and at
.00% of covered payroll, effective July 1, 2002. On this
basis, the total of employee and employer rates of
contribution is adequate to fund all future benefits
presently authorized, based on current service, and to
fund, over a period of 9 years from January 1, 2002,
the remaining accrued liability for past service.
Chart 2
Teachers’ and State Employees’
Retirement System of North Carolina
Year Ended December 31, 2001
Sources of Funds
Employee Contributions $606,695,436
Employer Contributions $224,705,629
Other Income $ 1,591,915
Investment Income ($840,781,443)
Applications of Funds
Retirement Benefits $1,769,822,982
Refunds $ 74,303,196
Administrative Expenses $ 7,940,299
Other Expenses $ 73,007
Addition to Reserves
For Future Benefits ($1,859,927,947)
13
Local Governmental Employees’ Retirement
System of North Carolina (Local System)
N.C.G.S. 128-21 Through 128-38
The Local System is maintained for the employees
of cities, towns, counties, boards, commissions, and
other entities of local government in North Carolina.
Because participation by local governments is
voluntary, the operation of the Local System is
dependent upon the acceptance and continuing
financial support of the governing bodies and
employees of local governments. Approval and
acceptance are evidenced by the fact that as of
December 31, 2001, a total of 879 cities, towns,
counties, and local commissions were participating in
the Local System.
This System began operations in 1945, with 18
participating local governments, 2,102 members, and
assets of $178,053. The active membership as of
December 31, 2001 was 134,679; in addition there
were 31,352 retired members and beneficiaries of
deceased members. Invested assets at market value
amounted to about $11.4 billion.
The distribution of investments of the assets of the
Local System as of Dec ember 31, 2001 was:
Long-Term Fixed Income
Investment Fund $4,956,185,382
Short-Term Fixed Income
Investment Fund 16,873,206
Real Estate Investment Fund 327,634,716
Equity Investment Fund 6,101,349,739
Venture Capital 17,739,482
Total $11,419,782,525
Operations of the Local System during the
calendar year 2001 resulted in total receipts of
$221,536,949 and total expenditures of $434,822,183.
Chart 3 presents the distribution of revenues by source
and expenditures by purpose.
The latest Actuary’s Valuation Balance Sheet for
the Local System, as of December 31, 2001, is shown
in Table 12.
Based on the actuary’s latest report, the Board of
Trustees set the employer normal contribution rate at
4.80% of covered payroll for general employees and at
5.27% of covered payroll for law enforcement officers,
effective July 1, 2002. The accrued liability rate, if any,
varies with each employing unit depending on the
amount of prior service that was awarded to the
members.
In accordance with the provisions of the legislation
that caused the merger of the Law Enforcement
Officers’ Retirement System and the Local
Governmental Employees’ Retirement System on
January 1, 1986, the normal contribution rates are
separate for each of the two groups of employees
while the accrued liability rate is the same.
Chart 3
Local Governmental Employees’
Retirement System of North Carolina
Year Ended December 31, 2001
Sources of Funds
Employee Contributions $226,787,046
Employer Contributions $187,962,135
Other Income $ 4,722,944
Investment Income ($197,935,175)
Applications of Funds
Retirement Benefits $378,766,233
Refunds $ 53,185,486
Administrative Expenses $ 2,842,905
Other Expenses $ 27,559
Addition to Reserves
For Future Benefits ($213,285,233)
14
Consolidated Judicial Retirement System
of North Carolina (Judicial System)
N.C.G.S. 135-50 Through 135-72
The Judicial System was created by the 1983
Session (Regular Session, 1984) of the General
Assembly, effective January 1, 1985. This System was
formed by combining the previously existing Uniform
Judicial, Uniform Solicitorial, and Uniform Clerks of
Superior Court Retirement Systems. The Courts
Commission was responsible for the design of the
benefit structure of the previous systems, which was
carried forward to the new consolidated system.
The membership of the Judicial System is
composed of the elected judges and justices, district
attorneys, and clerks of superior court of the General
Court of Justice. As of December 31, 2001, there were
487 active members and 382 retired members and
beneficiaries of deceased retired members. The
invested assets at market value were about $331.4
million.
The distribution of the investments of the Judicial
System as of December 31, 2001, was:
Long-Term Fixed Income
Investment Fund $139,678,979
Short-Term Fixed
Investment Fund 2,878,904
Real Estate Investment Fund 9,386,208
Equity Investment Fund 179,001,247
Venture Capital 484,413
Total $331,429,751
Operations of the Judicial System during the
calendar year 2001 resulted in total receipts of
$3,255,278 and total expenditures of $15,965,627.
Chart 4 presents the distribution of revenues by source
and expenditures by purpose.
The latest Actuary’s Valuation Balance Sheet for
the Judicial System, as of December 31, 2001, is
shown in Table 13. Based on the actuary’s latest
report, the General Assembly set the employer
contribution rate at 13.92% of covered members’
payroll, effective July 1, 2002. On this basis, the total of
member and employer rates of contribution is more
than adequate to fund all future benefits presently
authorized based on current service.
Chart 4
Consolidated Judicial
Retirement System of North Carolina
Year Ended December 31, 2001
Sources of Funds
Employee Contributions $3,243,975
Employer Contributions $5,963,188
Investment Income ($5,951,885)
Applications of Funds
Retirement Benefits $15,904,755
Refunds $ 37,012
Administrative Expenses $ 23,860
Addition to Reserves
For Future Benefits ($12,710,348)
15
Teachers’ and State Employees’ Benefit Trust
(Benefit Trust)
N.C.G.S. 135-5(I) ; 128-27(I); 143-166.20; And 143-166.60
The Benefit Trust was established January 1,
1980, by the Board of Trustees of the Teachers’ and
State Employees’ Retirement System, after enabling
legislation was enacted in the 1979 Session of the
General Assembly. The Board of Trustees of the Local
Governmental Employees’ Retirement System elected
to become a participating affiliate in the Trust at the
same date. The purpose of the Benefit Trust is to
provide group life insurance benefits for members of
these two retirement systems. Formerly, identical type
death benefits were provided directly by these
retirement systems.
All contributions to fund life insurance benefits are
paid by the State and local governments, participating
in one of the two retirement systems, to the Trust and
held separate and apart from any pension or retirement
funds. The funding method adopted for the Benefit
Trust is one-year term cost. The employ er contribution
rate to fund this benefit for members of the Teachers’
and State Employees’ Retirement System is .16% of
covered payroll. The employer contribution rate for
members of the Local Governmental Employees’
Retirement System is actuarially determined and varies
among employers.
The Benefit Trust further includes the Separate
Insurance Benefits Plan for State and Local
Governmental Law Enforcement Officers. The Plan
provides additional life insurance benefits to active and
retired law enforcement officers and additional accident
and sickness insurance coverage for law enforcement
officers. These benefits are funded by a $1.00 cost-of-court
assessment in each criminal case conviction in
the State.
Additionally, the Benefit Trust includes the Retiree
Death Benefit Plan. This plan is funded by participant
contributions. The benefit is $6,000 after 24 months of
contributions. If a participant’s death occurs before 24
months of contributions, the benefit is limited to a
refund of contributions.
Chart 5 graphically presents the distribution of
revenues by source and expenditures by purpose. The
number of deaths and amounts of benefit payments,
according to member group, during 2001 were:
Life Insurance Payments
Calendar Year 2001
Retirement System Number of Payment
Membership Payments Amount
Teachers’ and State Employees’ 467 $16,469,639
Local Governmental Employees’ 127 2,563,531
Chart 5
North Carolina Teachers’
and State Employees’ Benefit Trust
Year Ended December 31, 2002
Sources of Funds
Applications of Funds
State Death
Benefits Paid
$16,469,639
44.9%
Addition to
Reserves for
Future Benefits
$10,882,331
29.6%
Retirees' Death
Benefits Paid
$5,615,824
15.3%
Local Death
Benefits Paid
$2,563,531
7.0%
Death Benefits
and Insurance
Paid SIF
$926,655
2.5%
Administrative
Expenses
$270,507
.7%
Teachers' and
State Employees'
Retirement System
$8,276,415
22.5%
Retirees'
Death Benefit
$7,770,664
21.2%
Investment
Income
$15,971,066
43.5%
Local Governmental
Employees'
Retirement System
$3,519,485
9.6%
Separate
Benefits Fund
$1,190,852
3.2%
Legislative
Retirement System
$0
0%
16
Firemen’s and Rescue Squad Workers’ Pension Fund
(Pension Fund)
N.C.G.S. 58-86-1 Through 58-86-90
The Pension Fund was created by the 1959
Session of the General Assembly to provide benefits
for certified firemen. The statutes were amended to
include certified rescue squad workers beginning
January 1, 1982. Both volunteer and paid personnel
are included in the membership.
Funded by an initial appropriation of $235,000,
retroactive benefit payments amounting to $210,700
were made to 362 retirees during August of 1962, to
cover all benefits due and payable since July 1, 1961.
At June 30, 2002, the active membership of the fund
was 31,492 while the number of retired members was
8,619. Invested assets at book value amounted to
about $242.9 million.
The distribution of the investments of the assets as
of June 30, 2002, was:
Long-Term Fixed Income
Investment Fund $ 112,928,873
Short-Term Fixed Income
Investment Fund 709,036
Real Estate Investment Fund 7,179,066
Equity Investment Fund 121,706,059
Venture Capital 330,683
Total $ 242,853,717
Operations of the Pension Fund during the 2002
fiscal year resulted in total receipts of $4,129,293 and
total expenditures of $16,564,173. Chart 6 presents the
distribution of revenues by source and expenditures by
purpose.
The latest Actuary’s Valuation Balance Sheet, as
of June 30, 2001, is shown in Table 14. Based on the
latest actuary’s report, the General Assembly
appropriated $10,026,897 for the 2001-02 fiscal year.
The yearly appropriation will fund all future benefits,
based on current service, and will fund, over a period
of nine years from June 30, 2001, the remaining
accrued liabilities for past service.
Chart 6
Firemen’s and Rescue Squad Workers’
Pension Fund
Year Ended June 30, 2002
Sources of Funds
Appropriation $10,026,897
Member Contributions $ 4,196,356
Investment Income ($ 5,951,885)
Other Income $ 52
Applications of Funds
Pension Benefits $15,385,672
Refunds $ 570,758
Administrative Expenses $ 607,742
Addition to Reserves
For Future Benefits ($12,434,880)
Retirees’ Health Premiums Fund
This fund is used as a conduit of moneys flowing
from employers to pay individual coverage cost of
retirees’ health insurance. This coverage can be under
either the State’s health plan or approved health
maintenance organizations. Retirees from the
Teachers’ and State Employees’, Consolidated
Judicial, and Legislative Retirement Systems are
eligible for coverage. The method of collecting the
employers’ payments is a surcharge on active
members’ payroll payable with the employer
contribution rate to the affected retirement system.
Financial Information for 2001
Beginning Fund Balance $87,960,591
Additions:
Employer Contributions $ 188,228,165
Investment Income 0 188,228,165
Deductions:
Health Premiums Paid $ 216,891,616
Administrative Expense 165,804 217,057,420
Ending Fund Balance $59,131,336
17
Legislative Retirement Fund (Fund)
N.C.G.S. 120-4.1 Through 120-4.2
The Fund was created by the 1969 Session of the
General Assembly as a retirement plan for members
and elected officers of the North Carolina General
Assembly. The Fund was abolished, prospectively, by
the 1973 Session (Second Session 1974). The
abolishing Act preserved the vested and inchoate
rights of the members in the Fund so that all members
and former members of the General Assembly, who
had qualified by virtue of service as of 1974, are still in
receipt of monthly allowances or may apply for and
receive monthly allowances at age 65. There were 30
former members and officers of the General Assembly
in receipt of allowances, with a cost in the year ended
December 31, 2001, of some $43,500. The cost is
funded by a contribution of 5% of compensation paid
by members at retirement and an annual general fund
appropriation made to the General Assembly. The
Fund is not operated as a retirement fund, but as an
expendable trust fund.
Legislative Retirement System (System)
N.C.G.S. 120-4.8 Through 120-4.29
The Legislative Retirement System was created by
the 1983 Session of the General Assembly as a
retirement plan for members of the General Assembly.
The membership also includes: (1) members who were
vested or had maintained contributions in the
Legislative Retirement Fund; and (2) those retirees
receiving a benefit from the Legislative Fund who elect
to transfer to the Legislative Retirement System.
As of December 31, 2001, the System had 169
active members, 88 inactive members, and 204 retired
members. Assets on that date totaled $26,444.654.
Operations of the System during calendar year 2001
resulted in total receipts of $511,952 and
disbursements of $1,149,348.
Based on the latest actuarial report, the employer
contribution rate was set by the General Assembly at
.00% of covered payroll, effective July 1, 2002. On this
basis, the total of employee and employer rates of
contribution is adequate to fund all future benefits
presently authorized.
Disability Income Plan
N.C.G.S. 135-100 Through 135-113
The Disability Income Plan of North Carolina was
created in 1987 by the North Carolina General
Assembly with an effective date of January 1, 1988.
This plan replaced the former provisions for disability
retirement under the Teachers’ and State Employees’
Retirement System and replaced the benefits provided
under the former Disability Salary Continuation Plan.
The purpose of this plan is to provide equitable
replacement income for eligible teachers and State
employees who become temporarily or permanently
disabled for the performance of their duty prior to
retirement. Based on the latest actuarial report, the
General Assembly set the employer contribution rate to
fund this benefit at .52% of the covered payroll of
members of the Teachers’ and State Employees’
Retirement System and the Optional Retirement
Program, effective July 1, 2002.
The following are certain statistics relating to the
number of disabled members, number of new claims,
employer contributions, investment earnings, and
amount of benefit payments during the calendar years
ended 2000 and 2001.
2000 2001
Number of Disabled Members 4,285 4,490
New Claims During the Year 865 838
Employer Contributions $52,268,811 $55,638,722
Investment Income $25,988,037 $18,465,752
Amount of Benefit Payments $36,793,409 $40,311,759
Public Employees’ Social Security Agency
(Social Security Agency)
N.C.G.S. 135-19 Through 135-26
The Social Security Agency administers the State’s
responsibility under the Social Security Agreement
between the State of North Carolina and the United
States Secretary of Health and Human Services. This
Agreement was entered into on July 16, 1951 and
executed pursuant to authority in Section 218 of the
Federal Social Security Act and Article 2, Chapter 135,
of the General Statutes of North Carolina.
The provisions of the Agreement require the Social
Security Agency to provide the mechanics of coverage
for the State and its qualified political subdivisions, and
to act as liaison between the State and the Social
Security Administration.
18
National Guard Pension Plan (Guard Plan)
N.C.G.S. 127A-40
The Guard Plan was transferred to the Department
of State Treasurer for payment of monthly benefits by
the 1979 Session of the General Assembly, effective
July 1, 1979. This Division pays allowances based on
the certification of eligibility of former national
guardsmen by the Secretary of the Department of
Crime Control and Public Safety. The payments of
benefits are funded by State General Fund
appropriations by the General Assembly. As of
December 31, 2001, there were 2,060 beneficiaries in
receipt of monthly allowances from the Guard Plan at a
cost that calendar year of $1,976,450.
The 1983 Session of the General Assembly
enacted legislation, effective July 1, 1983, creating a
trust fund for financing National Guard Plan payments
and requiring that the Plan be maintained on a
generally accepted actuarial basis. Based on an
actuarial study after passage of this legislation, the
June 1984 Session appropriated $1,717,977 to begin
actuarial reserve funding. The funding appropriated for
2001-02 was $899,758.
Supplemental Retirement Income
Plan of North Carolina [401(k) Plan]
N.C.G.S. 135-90 Through 135-95; 143-166.30; And 143-166.50
The 1983 Session (Regular Session, 1984)
enacted enabling-type legislation creating the State’s
Internal Revenue Code Section 401(k) Plan effective
as of January 1, 1985. The Plan is a voluntary tax-deferred
savings/investment program designed to
supplement members’ replacement income in
retirement. The Plan is governed jointly by the State
Treasurer and a Board of Trustees composed of
members of the Boards of Trustees of the Teachers’
and State Employees’ and Local Governmental
Employees’ Retirement Systems.
Branch Banking and Trust Company (BB&T), the
Plan’s third-party administrator, is responsible under
the Plan document adopted by the Board, and the
terms of the contract with the Board, for all aspects of
operating the Plan. This responsibility includes
communications, record keeping, and investment
products.
The Plan’s number of participating members rose
from 169,549 as of July 1, 2001, to 178,058 members
as of June 30, 2002, for an increase of over 5.0%.
Contributions by employers during this fiscal year
totaled $102,458,171 while salary deferred
contributions by members were over $175,675,467.
The total assets at book value of the Plan increased by
8.7% to $2,456,468,057.
Under the current contract, members may select
from a bank investment contract, a money market
account, and eight mutual funds. As of June 30, 2002,
16.57% of the assets were invested in the bank
investment contract, 66.41% were invested in the
mutual funds, and 11.41% were invested in the money
market account. In addition, 5.14% of the assets were
loans receivable and 0.47% of the assets were cash on
deposit.
A portion of court cost receipts are deposited into
the account of each State and local government law
enforcement officer. For the year ended June 30, 2002,
court cost receipts of $1,848,217 were transferred and
credited to the State and local law enforcement
officers’ accounts.
The Supplemental Retirement Income Plan of
North Carolina continues to be the largest State
governmental 401(k) Plan in the United States.
Registers of Deeds’ Supplemental Pension Fund
N.C.G.S. 161-50 Through 161-50.5
The Registers of Deeds’ Supplemental Pension
Fund was created by the 1987 Session of the General
Assembly for the purpose of providing a supplement to
Local Governmental Employees’ Retirement System
benefits for Registers of Deeds. The stated purpose of
the Act was to attract the most highly qualified talent
available within the State to that county office.
In October of 1987 each county board of
commissioners began remitting monthly, to the
Department of State Treasurer, an amount equal to
4.5% of the receipts collected pursuant to Article 1 of
Chapter 161 of the General Statutes for deposit to the
credit of the Register of Deeds’ Supplemental Pension
Fund. As of December 31, 2001, the Fund had total
assets in the amount of $13,164,403.
Benefits from the Fund became payable beginning
July 1, 1988. For the year ending December 31, 2001,
the Fund paid total benefits in the amount of $728,520
to 68 retired Registers of Deeds.
19
State and
Local Government
Finance Division
The State and Local Government Finance Division
is organized to provide the State Treasurer, the Local
Government Commission, the North Carolina Solid
Waste Management Capital Projects Financing
Agency, and the North Carolina Capital Facilities
Finance Agency with staff assistance in fulfilling their
respective statutory functions. The Division is
organized along functional lines into two major groups
of services: Debt Management and Fiscal
Management.
The Local Government Commission (LGC) renders
assistance to local governments and public authorities
in North Carolina. The LGC, staffed by the Department
of State Treasurer, approves the issuance of debt for
all units of local government and assists these units
with fiscal management. The Commission is composed
of nine members: the State Treasurer, the Secretary of
State, the State Auditor, the Secretary of Revenue, and
five others by appointment (three by the Governor, one
by the General Assembly upon the recommendation of
the President Pro Tempore and one by the General
Assembly upon the recommendation of the Speaker of
the House.) The State Treasurer serves as Chairman
and selects the Secretary of the Commission, who
heads the administrative staff serving the Commission.
The North Carolina Solid Waste Management
Capital Projects Financing Agency provides a loan
fund for financing the capital expenses incurred in
implementing local and regional solid waste
management programs. The Agency Board of
Directors consists of five members: the State Treasurer
and four others by appointment (two by the Governor
and two by the General Assembly upon the
recommendation of one each by the Speaker of the
House of Representatives and the President Pro
Tempore of the Senate). Administrative staff for the
Agency is provided by the Department of State
Treasurer.
Nonprofit and for-profit corporations provi ding
certain services may receive financing assistance
through bonds issued by the North Carolina Capital
Facilities Finance Agency. The Agency Board of
Directors is composed of seven members: the State
Treasurer, the State Auditor, and five others by
appointment (three by the Governor, one by the
President Pro Tempore of the Senate and one by the
Speaker of the House of Representatives). The
administrative staff for the Agency is provided by the
Department of State Treasurer.
The Division handles the sale and delivery of all
State and local debt and monitors the repayment of
State and local government debt.
Operational Highlights
• Competitive tax-exempt general obligation
bonds for the State were sold totaling $605 million.
On March 12, 2002, $204.4 million tax-exempt
public school building, clean water and higher
education bonds (6.32 years average life) were sold
competitively at a true interest cost 114 basis
points below the national Bond Buyer’s Index (the
“BBI”), resulting in interest savings of
approximately $14.7 million over the life of the
bonds. On April 3, 2002, $10.6 million tax-exempt
clean water bonds (2.89 years average life) were
sold at a true interest cost of 3.4911%. In addition,
the State sold $35 million taxable natural gas
bonds on March 12, 2002 at a true interest cost of
3.6317%.
• Variable interest rate bonds for the State were
sold on May 1, 2002 totaling $355 million. These
bonds were for public schools, higher education
and clean water. The variable rate bonds will allow
the State to take advantage of low short-term rates
on longer-term debt, and an estimated $45 million
savings over the lifetime of the variable rate bonds
is expected.
• The staff continued its efforts to distribute and
receive information electronically. Memorandums,
manuals and comparative financial data for all
counties and municipalities are available through
the Department’s homepage. Annual financial
information reports were received electronically
from 98 counties and 335 municipalities.
• The State continued to retain its excellent bond
rating of “Triple-A,” one of only nine states in the
nation with this coveted rating from all three
national rating agencies.
Debt
Management
Fiscal
Management
Local
Government
Commission
Robert M. High
Director
Solid Waste
Management Capital
Projects Financing
Agency
North Carolina
Capital
Facilities Finance
Agency
20
• Of the $1.0 billion in general obligation bonds
sold for local governments $.9 billion were sold
competitively with rates averaging 95 basis points
under the national Bond Buyer’s Index, which
resulted in sa vings in excess of $53.5 million over
the life of these bonds.
• Bond issues totaling $293 million were
approved and sold for the North Carolina Housing
Finance Agency, thus increasing the supply of
affordable housing for North Carolinians of
moderate and low income.
• Industrial revenue and pollution control bonds
in excess of $81 million were issued to finance or
refinance 10 projects which created 189 jobs and
saved 7 jobs.
• Members of the staff worked with the Institute
of Government to present the First Annual State
Treasurer’s Conference on Local Government
Accounting, Auditing and Financial management
for local government auditors and officials.
• Memorandums were issued to local
governments and their auditors concerning
numerous GASB Statement No. 34 topics,
legislative changes, audit issues, and Single Audit
and financial reporting issues. Memorandums were
also issued comparing tax collection efforts,
operation of water and sewer systems, operation of
electric systems, operation of public hospitals and
school capital outlay spending among units.
• Installment purchase contracts were sold for
over $493 million, typically for smaller projects.
• The staff has developed the County and
Municipal Information Website:
(http://www.treasurer.state.nc.us/lgc/units/unitlistjs.htm)
. The site displays detailed financial, population
and property tax data for the latest six year period
for all North Carolina counties and municipalities.
• Twenty-three revenue bonds for over $611
million were sold for local governments, mainly for
hospitals, airports and water and sewer projects.
• Over $497 million in hospital revenue bonds
was sold for the North Carolina Medical Care
Commission through thirteen bond issues.
• Over $422 million was provided for capital
projects to private schools, colleges and other
nonprofit corporations through 19 bond issues by
the North Carolina Capital Facilities Finance
Agency.
• The staff reviewed the financial statements of
1,143 local governments and public authorities.
These audit reviews included 613 single audits and
200 yellow book audits required by federal and
State laws.
• The staff worked with local governments and
public authorities whose debt is subject to
secondary market disclosure requirements
established by the Securities Exchange
Commission to be certain that all required
disclosures were made by the date required.
Failure to meet those requirements would
negatively impact a unit’s ability to borrow in the
future. Two hundred and twelve units were
required to make this disclosure for the fiscal year
ended June 30, 2001.
• The thirteenth annual State Treasurer’s Awards
were presented to local governments and public
authorities that demonstrated significant
improvements in accounting or financial
management programs, systems, methods and
procedures. A State Treasurer’s Awards Program
was also established for nonprofit organizations
that provide valuable services to the citizens of the
State.
• In October the Local Government Commission
voted to assume control of the fiscal affairs of the
Town of East Spencer. The staff worked with local
officials to restore the fi scal integrity of the Town,
establish a sound system of fiscal management
and provide services essential to the health and
safety of the citizens of the Town.
• The staff worked with 19 State agencies to
compile and distribute more than 350 compliance
supplements for program grants administered by
the agencies. These supplements will be used by
auditors of local governmental units.
• The Staff closely monitored the impact of the
State budget upon the fiscal condition of cities and
counties.
• The LGC 203 Reports, Report of Investments
and Deposits, was updated to permit local
governments to submit the report electronically.
The State of Tax-Exempt Financing
As one of the few remaining tax shelters,
governmental bonds continue to be an attractive
means of financing for local governments. Without tax -
exempt financing, the interest rates charged on
borrowed funds could increase from 1 to 3 percentage
points resulting in a 20 to 30 percent increase in the
cost of financing. Utility customers and taxpayers
would ultimately pay this increase.
Market conditions were favorable for tax-exempt
debt during the fiscal year. The Bond Buyer’s Index of
20 General Obligation Bonds ranged from a low of
4.91% on November 8, 2001 to a high of 5.34% on
March 11, 2002.
21
The Basic Functions
Debt Management
The Division issues and monitors all State debt
secured by a pledge of the taxing power of the State.
After voter approval of a bond issue and with the
assistance of other State agencies, the Division
determines the cash needs, plans for the repayment of
debt (maturity schedules), and schedules bond sales at
the most appropriate time. An official statement
describing the bond issue and other required
disclosures about the State is prepared with the advice
and cooperation of bond counsel. Finally, the Division
handles the actual sale and delivery of the bonds,
maintains the State bond records and register of
bonds, and monitors the debt service payments. At
June 30, 2002, the State had general obligation bonds
outstanding of $3,458 billion. (See Tables 8 and 9.)
The Division also is responsible for the
authorization and sale of revenue bonds for the North
Carolina Medical Care Commission, the Municipal
Power Agencies, the North Carolina Capital Facilities
Finance Agency, the North Carolina Housing Finance
Agency and the North Carolina Solid Waste
Management Capital Projects Financing Agency. Only
the specific revenues pledged in payment thereof
secure these bonds. The staff works with these
agencies’ personnel in determining the feasibility and
scheduling of the bond offering, in structuring the issue
and the underlying security documents, and in
preparing the data that must be presented to the Local
Government Commission for its approval.
The Division assists the State Treasurer in
representing the State in all presentations to Moody’s
Investors Service, Inc.; Standard and Poor’s
Corporation; and Fitch, Inc., the three national bond
rating agencies used by the State and local
governmental units in North Carolina. At June 30,
2002, the State had a “Triple-A” rating, the highest
rating attainable, from all three national rating
agencies. These favorable ratings has enabled the
State to sell its bonds at an interest rate considerably
below the Bond Buyer’s Index, thereby providing
tremendous savings to North Carolina’s taxpayers.
Another important function of the Division is the
approval, sale, and delivery of all North Carolina local
government bonds and notes. The Division staff
counsels and assists local governmental units in
determining the necessity of the project, the size of the
issue, and the most expedient form of financing. A
review is made of the debt management policies of the
unit, the effect of the financing on the tax rate, and the
unit’s compliance with The Local Government Budget
and Fiscal Control Act. Sale dates are scheduled
depending on the need for the money, the anticipated
interest rates, and the times when the bonds can be
sold with a minimum of competition. The staff strives to
resolve all problems and determine that all statutory
requirements are met before applications are
presented to the Local Government Commission for
approval.
After approval is granted, the governmental unit
and its bond counsel assist the staff in gathering and
assembling information for an official statement, which
is mailed to a large group of potential bidders
nationwide. The general obligation bonds are awarded
through the competitive bid process on the basis of
lowest total net interest cost to the governmental unit.
After the sale, the staff delivers and validates the
definitive bonds and ensures that the moneys are
promptly transferred from the buying brokers to the
governmental unit.
In addition to bond sales, the staff assists the units
in selling certain short-term debt obligations. These
may be bond anticipation notes to provide interim
funding of projects until the definitive bonds are sold, or
they may be other notes secured by specific pledges of
taxes, grants, or future revenues. Authorization for
short-term debt obligations also is based upon Local
Government Commission approval.
Debt records are maintained for all units on
principal and interest payments coming due in the
current and future years. All debt service payments are
monitored through a system of monthly reports.
At June 30, 2002, authorized and unissued general
obligation bonds for local governments amounted to
$2.7 billion; and general obligation debt outstanding
amounted to over $7.5 billion. (See Table 8.) During
the 2001-2002 fiscal year, bonds and notes were sold
in the amount of $1,774,459,850. (See Chart 31.) Of
the $1,040,178,160 in general obligation bonds
marketed for local units, over $.9 billion were sold
competitively at tax-exempt rates averaging
approximately 95 basis points below the national
average (according to the Bond Buyer’s Index). Over
the life of these bonds, the issuers are expected to
save in excess of $53.5 million in interest costs. Such
savings are a result, in part, of the Division’s
successful efforts in maintaining and upgrading the
bond ratings of the State and local units and in
monitoring the fiscal soundness of the individual local
units.
The Division’s staff also assists in the sale of
revenue bonds, which must have the Commission’s
approval in order to be issued by municipalities, joint
municipal electric power agencies, and county
industrial facilities and pollution control financing
authorities. These bonds are secured only by specific
revenue pledged in payment of the bonds. (See Charts
31 and 32.)
22
Another responsibility of the Division’s staff is
assisting units that desire to enter into agreements to
finance the lease or installment purchase of capital
assets. Local Government Commission approval is
required when the contract or agreement extends for
five or more years; and obligates the unit to pay sums
of money to another, without regard to whether the
payee is a party to the contract; and obligates the unit
to the extent of $500,000 or a sum equal to one tenth
of one percent (.001) of the appraised value of property
subject to taxation by the unit, whichever is less. Local
Government Commission approval also is required
when the contract or agreement involves the
construction or repair of fixtures or improvements on
real property and it is not exempted in G.S. 159-148(b).
Before approving such agreements, the Local
Government Commission must find that the proposed
project is necessary and expedient, the proposed
undertaking cannot be economically financed by a
bond issue, and the contract will not require an
excessive increase in taxes. During the fiscal year
ended June 30, 2002, the Local Government
Commission approved contracts or other agreements
totaling $493.9 million. (See Tables 6 and 7.)
The Division also serves as staff to the North
Carolina Capital Facilities Finance Agency, an agency
established by the General Assembly in 1986.
Originally named the North Carolina Educational
Facilities Finance Agency, the act creating the Agency
has been amended several times and its ability to
finance capital projects significantly expanded.
Following initial contact from an applicant, the staff
generally begins the process of determining project
feasibility and desirability with a preliminary
conference. Upon receipt of an application, financial
capability and responsibility is reviewed through ratio
and trend analysis. The staff presents the project and
its recommendations to the seven-member North
Carolina Capital Facilities Finance Agency and
subsequently to the Local Government Commission for
approval. (All debt issued by the Agency also must be
approved by the Local Government Commission.)
Fiscal Management
Another function of the Division involves monitoring
certain fiscal and accounting standards prescribed for
local governmental units by The Local Government
Budget and Fiscal Control Act. As a part of its role in
assisting local units and monitoring their fiscal
programs, the Division provides guidance in following
generally accepted accounting principles. The Local
Government Budget and Fiscal Control Act requires
each unit of local government to have its accounts
audited annually by a Certified Public Accountant or by
an accountant certified by the Commission as qualified
to audit local government accounts. That audit must be
performed in accordance with Generally Accepted
Auditing Standards promulgated by the AICPA. If a
governmental unit is required to have an expanded
audit performed in accordance with Government
Auditing Standards, the auditor is required to provide
the unit and the Local Government Commission with a
copy of the audit firm’s most recent peer review report
prior to contracting for the audit. Each local
government is required to file a copy of its annual audit
report with the Division and submit all invoices to the
Division for approval. The Division monitors the annual
audit reports for compliance with generally accepted
accounting principles and single audit disclosure
requirements. Also, a detailed analysis is made of the
financial condition of each unit. In analyzing a unit’s
financial condition, staff members look not only at
financial ratios and budgetary indicators, but also at
possible trends that may be early warning signs of
potential financial difficulties. Problems or concerns are
brought to the attention of the governmental units and,
if problems persist or become more serious, unit visits
are made by staff members in order to provide hands -
on technical assistance.
In providing assistance to local governments, units
are counseled in accounting systems and internal
controls, cash and investment management, budget
preparation, risk management, capital planning, and
changes in laws and regulations. Staff members also
perform research and provide technical assistance to
local governments with specific questions in these
areas. On-site assistance is furnished to local
governments with regard to financial and accounting
systems and management services. Educational
programs, in the form of seminars and classes, also
are provided in order to accomplish these tasks. Staff
members make presentations throughout the year at
various workshops sponsored by the Institute of
Government; the North Carolina Government Finance
Officers Association; the North Carolina Association of
County Finance Officers; the Association of
Government Accountants; the N.C. Local Government
Investment Association; and numerous other county,
municipal, and school organizations. The Staff also
worked with the Institute of Government to present the
First Annual State Treasurer’s Conference on Local
Government Accounting, Auditing and Financial
Management to provide training to local government
auditors and officials.
The Division has expanded its assistance role by
maintaining computerized databases of historical
information from local government audit reports, city
and county Annual Financial Information Reports, and
Reports of Deposits and Investments. The information
collected is used in a variety of ways to automate
operations and enhance the assistance provided to
local governments. The files also are utilized in special
projects that benefit the operations of the State. Upon
request, data is provided to such organizations as the
23
U.S. Bureau of the Census, the N.C. Department of
Revenue, the General Assembly, the N.C. League of
Municipalities, the Institute of Government, and the
N.C. Association of County Commissioners to assist
these groups in their activities.
Because of recent changes in the field of
governmental accounting and the enactment of the
Federal Single Audit Act and the State Single Audit
Act, continuing assistance is provided to the
independent auditors of local governments,
particularly in the area of professional education.
The Staff reviewed and compiled over 350
compliance supplements from State agencies to be
used by local government auditors. A member of the
staff serves on the Governmental Accounting and
Auditing Committee of the North Carolina
Association of Certified Public Accountants. Staff
members provide additional assistance to
independent auditors by researching their questions
concerning governmental accounting, auditing, and
budgeting, as well as North Carolina laws. In
addition, all exposure drafts of the Governmental
Accounting Standards Board (GASB) are analyzed,
and any comments and recommendations that staff
may have on these drafts are submitted to the
GASB.
Significant Accomplishments
Debt Management
North Carolina General Obligation Bonds —In
2001-02 the State sold general obligation bonds
totaling $605 million. On March 12, 2002, $204.4
million tax-exempt public school building, clean water
and higher education bonds (6.32 years average life)
were sold at a true interest cost 114 basis points below
the national Bond Buyer’s Index (the “BBI”), resulting in
interest savings of approximately $14.7 million over the
life of the bonds. The State also sold $35 million
taxable natural gas bonds on March 12, 2002 at a true
interest cost of 3.6317%. On April 3, 2002, $10.6
million tax-exempt clean water bonds (2.89 years
average life) were sold at a true interest cost of
3.4911%. Variable interest rate bonds for the State
were sold on May 1, 2002 totaling $355 million. These
variable rate bonds consisted of public school building,
clean water bonds and higher education bonds. The
variable rate bonds will allow the State to take
advantage of short-term rates on longer-term debt, and
approximately a $45 million savings over the lifetime of
the variable rate bonds is expected. The public school
building bonds were approved by the voters of the
State in November 1996, the clean water and natural
gas bonds each in November 1998 and the higher
education bonds in November 2000.
Installment and Lease Purchase Agreements — The
installment and lease purchase method of financing
continues to be used by local governments, typically
for smaller projects for which a bond referendum is not
cost effective and for essential projects for which units
of government face mandates. The number of
installment and lease purchase agreements approved
decreased from 102 to 96 and the dollar volume
approved decreased from $706.9 million in FY 2000-
2001 to $493.9 million in FY 2001-02. (See Tables 6
and 7.) The actual amount of installment and lease
purchase agreements closed during the year totaled
$461.9 million. (See Chart 32.)
Revenue Bonds --- Interest in revenue bond
financing continued. These bonds are secured by the
revenues of the projects being financed rather than
property taxes and do not require a vote of the people.
During 2001-2002 the Local Government Commission
sold over $611 million in revenue bonds in 23 separate
issues for local governments. Economic growth, viable
enterprise activities and the narrowing of rate
differential between general obligation bonds and
revenue bonds have been factors in the increased
interest in this type of financing. However, revenue
bonds are more costly than general obligation bonds
because of both higher interest rates and increased
issuance costs. Most of the revenue bonds in 2001-
2002 continued to be for water and sewer projects.
North Carolina Medical Care Commission
Bonds — During 2001-2002 the Local Government
Commission approved and sold thirteen separate
issues of bonds and notes for the North Carolina
Medical Care Commission totaling over $497 million.
This activity continues to reflect the rapidly changing
environment of health-care as facilities continue to
position themselves for an uncertain future with
Medicare/Medicaid adjustments, further changes in the
managed care industry and an aging population
demanding more services at lower costs. The largest
issue was for Mission St. Joseph’s Health System for
$110 million to provide for construction and other
renovations. In attempting to meet the needs of our
aging population, eight independent living/assisted
living issues providing for the acquisition or financing of
eight separate facilities were successfully completed
during 2001-2002. Diverse issue needs were met
through fixed rate revenue bonds and variable rate
demand revenue bonds. In attempting to better
address the continuum of health-care, careful planning
and evaluation will continue to be given to additional
project risks and innovative techniques used in their
financing to insure both project success and
bondholder confidence.
North Carolina Housing Finance Agency —
The North Carolina Housing Finance Agency (NCHFA)
is a self-supporting State agency created by the
General Assembly in 1973 to increase the supply of
24
affordable housing for North Carolinians of moderate
and low income. The agency sells tax-exempt revenue
bonds to finance mortgages for first-time homebuyers
at interest rates below conventional market rates. In a
companion program, it converts part of its bond
authority to provide tax credits (Mortgage Credit
Certificates) which first-time homebuyers use in
conjunction with conventional loans to lower the cost of
home ownership. The agency also issues bonds to
finance privately owned rental housing for low-income
households. In addition, it finances affordable housing
through the federal Housing Credit Program, HOME
Investment Partnership Program, and the State’s
Housing Trust Fund. In its history, the agency has
issued more than $5.9 billion in tax-exempt bonds and
tax credits to produce and provide housing for over
153,500 households. In FY 2001-2002, financing and
tax credits were provided to support total development
of $642 million. This includes $293 million through
bond sales and 2 mortgage credit certificate elections
totaling $151 million. The Agency also issued $9.7
million in multifamily revenue bonds for housing for the
elderly.
Industrial Revenue Bonds — The use of
industrial revenue bonds has contributed to North
Carolina’s impressive record of industrial development.
These bonds provide tax-exempt financing and are
used to attract manufacturing industries to the State.
Since 1976, there have been 1,097 issues totaling over
$6.1 billion. These 1,097 issues have created over
97,000 jobs and saved over 39,000 jobs. In the fiscal
year ended June 30, 2002, 10 issues of Industrial
Revenue and Pollution Control Facilities Bonds were
issued for a total of $81,705,000. This resulted in the
creation of 189 jobs and 7 jobs saved. Additionally,
$40,885,000 of special purpose bonds were issued by
local industrial and pollution control authorities on
behalf of non-profit corporations.
Volume Cap Allocation — Legislation was
approved by the 1987 Session of the General
Assembly to maintain a State pool of the federal
volume cap from which projects for industry, low and
moderate income housing, low-interest rate student
loans, etc., could be approved, thus giving maximum
flexibility in use of the volume cap. The volume cap
allocation affords tax-exempt financing for projects of
this type. For the calendar year 2002, the State was
allotted $614 million to use for private activity bonds. In
2003, the volume cap is expected to increase slightly.
The Tax and Trade Relief Act increased the per capita
allotment from $50 to $75 with the increase phased-in
from 2003 to 2007.
“Triple-A” General Obligation Bond Ratings —
A “Triple-A” general obligation bond rating is the
highest attainable and reflects strengths in debt
position, economic base, administrative variables, and
financial performance. Standard & Poor’s rating
agency has assigned “Triple-A” general obligation
long-term debt ratings to states, counties, and cities
throughout the entire United States; approximately one
out of every four of those are North Carolina units. The
following North Carolina units have “Triple-A” bond
ratings issued by Standard & Poor’s: the State of North
Carolina; the counties of Durham, Forsyth, Guilford,
Mecklenburg, and Wake; and the cities of Cary,
Charlotte, Durham, Greensboro, Raleigh, and Winston-
Salem. In addition, the Special Airport District of
Durham and Wake counties also enjoy a “Triple-A”
rating. To quote from Standard & Poor’s Credit
Surveys: “The ‘AAA’ General Obligation rating for
cities, counties, and states indicates that very high
standards have been achieved and maintained.”
North Carolina Capital Facilities Finance
Agency — The North Carolina Capital Facilities
Finance Agency (NCCFFA) was created in 1986, was
originally named the North Carolina Educational
Facilities Finance Agency, and provided the benefits of
tax-exempt financing to nonprofit private institutions of
higher education in the State of North Carolina. This
act was amended in 1998 session of the General
Assembly to broaden its powers to permit financing
facilities of kindergarten, elementary and secondary
nonprofit private schools again in the 1999-2000
session and change its name to its present name and
to allow it to finance additional types of capital projects.
The additional types of capital projects able to be
financed include student housing facilities when owned
or operated by an institution other than an institution of
higher education or elementary or secondary
education. Also included within the authority of the
NCCFFA are special purpose projects which are
defined to include water systems or facilities, including
all plants, works, instrumentalities, and properties used
or useful in obtaining, conserving, treating, and
distributing water for domestic or industrial use,
irrigation, sanitation, fire protection, or any other public
or private use; sewage disposal systems or facilities,
including all plants, works, instrumentalities, and
properties used or useful in the collection, treatment,
purification, or disposal of sewage, other than facilities
constituting a water pollution control facility; public
transportation systems, facilities, or equipment,
including bus, truck, ferry, and railroad terminals,
depots, trackages, vehicles, and ferries, and mass
transit systems; public parking lots, areas, garages,
and other public vehicular parking structures and
facilities; public auditoriums, gymnasiums, stadiums,
and convention centers; recreational facilities; land,
equipment, and facilities for the disposal, treatment, or
recycling of solid or other waste that are described in
G.S. 159I-8; facilities for the provision of rehabilitation
services, education, training, and employment
opportunities for persons with disabilities and the
disadvantaged not to include a retail facility, however,
unless the proposed operator of the facility certifies
that at least seventy-five percent of its employees will
be disadvantaged or disabled persons and at least
seventy-five percent of its inventory will be composed
of used, donated items and items manufactured by
disadvantaged or disabled persons. While the 1999-
2000 amendments, effective July 1, 2000, made
significant changes in the scope of activities of the
25
agency, they did not affect the bonds outstanding in
any material respect.
The NCCFFA has provided $1,611,289,979 in
tax-exempt capital financing through 112 issues. This
amount includes $23,600,000 in tax-exempt financing
originally issued by the North Carolina Industrial
Facilities and Pollution Control Facilities Financing
Authority in three issues on behalf of 12 corporations.
There have been no defaults. At June 30, 2002, there
were $1,257,164,275 in outstanding obligations. Each
issue is payable solely from revenues derived from
each corporate entity financed, is separately secured,
and is separate and independent from all other series
of bonds as to source of payment and security. During
the fiscal year ended June 30, 2002, the NCCFFA
issued $422,728,000 for 18 institutions. The Annual
Report of the NCEFFA is available from the Office of
the State Treasurer.
North Carolina Clean Water Revolving Loan
and Grant Funds — The North Carolina Clean Water
Revolving Loan and Grant Fund was established by
the 1987 General Assembly to provide low-interest rate
loans to local governments constructing or improving
water and sewer operations. Demand for the funds has
far exceeded the amount appropriated. The intent is for
this fund to become self-perpetuating and for a
permanent water and sewer loan fund to be made
available.
The staff is responsible for reviewing the
applicant’s fiscal/debt management policies;
determining the feasibility of the project; and
coordinating the loan offers with the Department of
Environment and Natural Resources. Maturity
schedules are prepared for each loan, and the staff
oversees the signing of the promissory notes.
In 2001-2002, a total of sixteen units were selected
to receive revolving loans ranging from $54,466 to
$13,566,459. Additionally, five State bond loans were
approved ranging from $36,850 to $2,875,000.
26
Chart 7
Total
School Utilities Refunding Other No. Amount
G.O. Bonds
Counties $ 439,850,000 $ 15,010,000 $ 138,840,000 $ 132,600,000 23 $ 726,300,000
Municipalities $ - $ 40,408,000 $ 74,258,000 $ 150,260,000 24 $ 264,926,000
Districts and Authorities $ - $ 41,954,300 $ 6,997,800 $ - 13 $ 48,952,100
Total G.O. Bonds $ 439,850,000 $ 97,372,300 $ 220,095,800 $ 282,860,000 60 $ 1,040,178,100
Revenue Bonds
Counties $ - $ - $ - $ 31,780,000 2 $ 31,780,000
Municipalities $ - $ - $ 84,250,000 $ 225,685,000 7 $ 309,935,000
Districts and Authorities $ - $ 21,865,000 $ 152,483,000 $ 95,810,000 14 $ 270,158,000
Total Revenue Bonds $ - $ 21,865,000 $ 236,733,000 $ 353,275,000 23 $ 611,873,000
Special Obligation Bonds
Solid Waste - - - - $ -
Total Special Obligation $ - $ - $ - $ - $ - $ -
Bonds
State Bond and Revolving
Loans
Counties $ - $ 7,478,415 $ - $ - 2 $ 7,478,415
Municipalities $ - $ 25,223,085 $ - $ - 12 $ 25,223,085
Districts $ - $ 6,713,746 $ - $ - 2 $ 6,713,746
Total State Bond and $ -
Revolving Loans $ - $ 39,415,246 $ - $ - 16 $ 39,415,246
Notes
G.O. Bond Anticipation
Notes $ - $ 59,684,000 $ - $ 26,725,000 28 $ 86,409,000
Revenue Notes - $ - - $ - 0 $ -
Total $ - $ 59,684,000 $ - $ 26,725,000 28 $ 86,409,000
Total Bonds and Notes $ 439,850,000 $ 218,336,546 $ 456,828,800 $ 662,860,000 127 $ 1,777,875,346
27
Chart 8
Debt Management Activities – State and Local (In Millions)
FY 2001-02 FY 2000-01 FY 1999-00
No. Amt. No. Amt. No. Amt.
Bonds Sold for State
G.O. Bonds (General Fund) 4 $ 605.0 2 $ 680.0 3 $ 200.0
G.O. Bonds (Highway Fund) 0 - 0 - 0 -
Total 4 $ 605.0 2 $ 680.0 3 $ 200.0
Bonds and Notes Sold for Local Government Units:
G.O. Bonds 60 1,040.2 42 1,290.5 37 587.8
Revenue Bonds 23 611.8 26 786.8 19 487.4
State Bond and Revolving Loans 16 39.4 13 17.6 17 30.0
Special Obligation Bonds - Solid Waste 0 - 0 - 4 16.4
G.O. Notes 28 86.4 33 82.1 21 39.0
Revenue Notes 0 - 0 - 0 -
Total 127 $ 1,777.8 98 $ 2,177.0 173 $ 1,160.6
Installment/Lease Contracts Sold for Local Units: 70 $ 461.9 104 $ 627.2 110 $ 571.6
Revenue Bonds Sold for:
Medical Care Commission 13 497.1 12 435.1 12 281.3
Housing Finance Agency 3 302.8 4 152.2 4 265.0
Power Agencies 0 - 3 - 3 420.9
Industrial Facilities and Pollution Control
Financing Authorities 15 122.9 26 578.9 26 247.5
Capital Facilities Finance Agency 19 455.9 16 196.1 16 224.6
Total 50 $ 1,378.7 61 $ 1,362.3 65 $ 1,439.3
Grand Total 251 $ 4,223.4 265 $ 4,846.5 351 $ 3,371.5
28
Fiscal Management
The North Carolina Capital Management Trust —
The balance of the Cash Port folio in the North Carolina
Capital Management Trust (NCCMT) decreased
approximately 3.4% from June 30, 2001 to June 30,
2002. This decrease occurred because units had less
funds available for investment. At fiscal year-end, the
Cash Portfolio totaled $3.9 billion, while the Term
Portfolio had a year-end balance of $71.5 million. The
North Carolina Capital Management Trust (NCCMT) is
a SEC-registered mutual fund, organized in April 1982
as an investment available only to North Carolina units
of government and public authorities. The Trust is
under the direction of a Board of Trustees, the majority
of which are elected by the participating shareholders
(units of government and public authorities) based
upon their ownership shares of the Trust. There were
562 participants in the Cash Portfolio at June 30, 2002,
compared to 556 at June 30, 2001. The number of
participants in the Term Portfolio was 43 at June 30,
2002. The NCCMT, a AAAm rated fund by Standard
and Poor's, is one of the largest local government
investment pools in the nation.
Review of Semi-annual Reports of Deposits
and Investments — The semi-annual Reports of
Deposits and Investments for the six months ended
June 30, 2001, and December 31, 2001, submitted by
local governments and public authorities, were
examined by the staff of the Division. The reports were
reviewed to determine strengths and weaknesses in
the units’ investment portfolios and to identify instances
of noncompliance with the North Carolina General
Statutes. Weaknesses were communicated in writing
to the units along with suggestions for improvement.
Financial Section of Bond Offering Statements —
The staff prepared or assisted in the preparation of the
financial section of 37 bond offering statements during
the fiscal year. The purpose of the financial section of a
bond offering statement is to provide users with several
years’ financial information about a unit of local
government. In order to be most meaningful, the
presentation of this multi-year information must be
consistent in its application of generally accepted
accounting principles (GAAP), a particular unit’s
accounting policies, and the requirements of the
General Statutes.
The financial section of a local government’s bond
offering statement includes: 1) a copy of the unit’s most
recently audited and issued general purpose financial
statements, including the notes; 2) compiled financial
statements of the governmental and enterprise fund
types of the unit for the three most recent fiscal years,
also including notes; and 3) compiled budget
statements for all annually budgeted governmental and
enterprise fund types that summarize the budgets
adopted subsequent to the most recently audited fiscal
year.
The preparation of the financial section of bond
offering statements requires a careful analysis and can
be a very complex process. First, the staff reviews the
most recent year’s general purpose financial
statements for presentation in accordance with GAAP
and compliance with North Carolina statutes, and
sometimes requests that changes be made in order for
the statements to be of the highest possible quality.
Next, the staff prepares compiled financial statements
of governmental and enterprise fund types for the three
most recent fiscal years. Adjustments must often be
made for changes in presentation, changes in GAAP,
changes in the reporting entity, or corrections of errors.
Any material adjustments made are fully disclosed in
the notes to the compiled financial statements. Finally,
the staff reviews compiled budgets prepared by the
unit. With the pending implementation of Governmental
Accounting Standards Board Statement No. 34, this
section of the offering statement may undergo some
changes in the coming years to accommodate the
transition to the new reporting format dictated by this
Statement.
Analysis of Official Pronouncements —Each
year the staff analyzes proposed changes or additions
to accounting standards that would eventually affect
State and local government financial reporting. The
majority of such changes are issued by the
Governmental Accounting Standards Board (GASB),
which has the authority to set GAAP for state and local
governments. The purpose of the staff’s responses is
to provide input into the development of governmental
accounting standards in light of the impact they would
have on North Carolina local governments and the
State as well. During the past year, the staff analyzed
proposed GASB standards dealing with reporting
requirements for affiliated organizations of local
governments.
State Treasurer’s Conference on Local
Government Accounting, Auditing and Financial
Management, and Other Continuing Education
Courses and Conferences. — Staff members worked
with the Institute of Government to present the first
annual conference. The conference was intended for
both local government auditors and officials. The
conference provided much needed training at a very
reasonable cost. It was conducted on two sites, and
drew nearly 200 participants at each site. Topics
covered included GASB Statement 34, Governmental
Auditing Standards, budgeting, purchasing, reporting
and audit issues.
Staff members spoke at approximately 25
continuing education courses and conferences
sponsored by organizations such as the Institute of
Government, the North Carolina Government Finance
Officers Association, the North Carolina Association of
County Finance Officers, the North Carolina Local
Government Investment Association, the Association
of Government Accountants, the North Carolina
Association of Council of Governments Finance
29
Directors, and the North Carolina Association of
Certified Public Accountants. Instruction was provided
by the staff at the beginning, intermediate, and
advanced levels for a wide range of local government
employees and board members as well as
independent auditors of local governments.
Monitoring Compliance with “Yellow Book”
Requirements — Paragraph 3.36 of the 1994 edition
of Government Auditing Standards issued by the
Comptroller General of the United States, commonly
known as the “Yellow Book,” contains a requirement
that auditors submit a copy of their most recent peer
review report to the party contracting for the audit. This
requirement was first effective for audits of financial
statements for the fiscal year ended June 30, 1995.
Auditors are required by the “Yellow Book” to have an
external review of their quality control procedures once
every three years. In order for audit contracts to be
approved, auditors are required to submit a copy of
their most recent report to the unit of government and
to our staff. External quality review reports have been
received from 286 offices of CPA firms.
Audit Manual for Governmental Auditors — The
audit manual issued to CPAs performing governmental
audits in North Carolina contains the following:
references to authoritative sources and literature, a
sample request for proposal for audit services,
checklists for statutory compliance with The Local
Government Budget and Fiscal Control Act and The
School Budget and Fiscal Control Act, a governmental
audit program, illustrative financial statements (for a
municipality, a county, a county board of education, a
housing authority, and a charter school), sample
independent auditor’s reports as well as single audit
reports, memoranda and publications, and compliance
supplements written by State agencies for various
federal and State grants. The State Single Audit
legislation mandates the preparation of compliance
supplements by State agencies, their review,
compilation, and issuance by the Department of State
Treasurer. Checklist for North Carolina requirements
related to purchasing, and contracting, and related
party transactions were added this year. Audit
procedures for unclaimed property were also added. In
addition, the manual is updated each year to reflect the
pronouncements of the GASB, Statements of Position
of the AICPA, circulars issued by the Federal Office of
Management and Budget, and other newly available
information. During the past year, the illustrative
Financial Statements were revised for the
implementation of GASB Statement No. 33 and
Statements No. 34, No. 37, No. 38 and GASB
Interpretation No. 6.
Audit Review Process — The staff of the Division
annually reviews the audit reports of approximately
1,143 units of local government. Each review consists
of the following: an analysis of proper presentation of
the financial statements in accordance with generally
accepted accounting principles; an analysis of proper
reporting in accordance with single audit requirements,
where applicable; and an evaluation of the financial
condition of the unit and its compliance with The Local
Government Budget and Fiscal Control Act, as well as
other State laws. Where problems are noted, local
governments and public authorities, as well as their
independent auditors, receive written communication
expressing the staff’s concerns, suggestions for
improvements, and an offer of further assistance, if
needed. A response detailing the unit’s plans to take
corrective action is requested. Approximately 200 of
these letters were sent to units of local government
during the 2001-2002 fiscal year.
As a part of the audit review process, the Division’s
staff reviewed approximately 613 single audits. An
extensive review is performed to ensure that audits
performed under the federal and State single audit acts
meet all the provisions of the law, as well as federal
and State requirements. This is necessary before
auditors’ invoices can be approved for payment, and
so State departments and agencies can rely on the
reports as a basis for compliance with applicable
federal and State regulations.
Local governments and public authorities receiving
a certain amount of federal and/or State financial
assistance must have a financial statement audit done
in accordance with Government Auditing Standards
(the “Yellow Book”). The Division’s staff reviewed
approximately 200 “Yellow Book” audits.
Memoranda and Other Publications — A
significant service provided by the staff of the Division
is the preparation and distribution of memoranda to
units of local government and their independent
auditors. These memoranda are of an informational,
technical, or statistical nature and are distributed to
finance officers, elected officials, and independent
auditors periodically throughout the year.
Topics of particular interest this year include
numerous memoranda related to the implementation of
GASB Statement No. 34, legislative changes, audit
issues, and Single Audit and financial reporting. Other
topics include the collateralization of public deposits,
and procedures for the approval of audit contracts and
invoices.
Other memoranda distributed by the staff
throughout the year contain statistical data of use to
the governmental units, their independent auditors, and
elected officials. Examples include a report and
analysis of cash and taxes of municipalities and
counties as reported at June 30, 2000; fund balance
available for appropriation in the General Fund of
municipalities and counties at June 30, 2000; county
spending for public school capital outlay; statistical
information on electric system operations; statistical
information on water and sewer system operations;
and statistical information on public hospital
operations. Governmental units may use these reports
to compare their operations to those of other units of
like-size, geographic location, or to statewide
averages. Independent auditors use this information to
assist in the audit process. The report on county
spending for schools is required by the N.C. General
30
Statutes to be prepared and provided to the General
Assembly.
Another publication updated annually is an
illustrative comprehensive annual financial report
(CAFR), prepared in cooperation with the Institute of
Government in Chapel Hill. The CAFR is utilized as
supporting material for educational programs
conducted by the Institute.
State Treasurer’s Governmental Accounting/Financial
Management Awards Program — The Department
sponsored the thirteenth annual “State Treasurer’s
Governmental Accounting/Financial Management
Awards Program.” This awards program is designed to
recognize units of government that have enhanced
their current operations through the implementation of
new and improved accounting and financial
management programs.
Entries addressing a variety of topics were
submitted for this year’s awards program. The
applications were evaluated by the Governmental
Accounting and Auditing Committee of the North
Carolina Association of Certified Public Accountants
(NCACPA). The awards are presented by a
representative of the Department and the NCACPA
during board meetings of the individual units.
The awards program benefits applicant units that
are recognized for their efforts and accomplishments.
Also, an exchange of ideas between local governments
occurs as a result of the publicity surrounding this
program. Application forms are sent electronically
annually to all local units of government.
State Treasurer’s Accounting/Financial
Management Awards Program for Nonprofit
Organizations — The Department established the
awards program for nonprofit organizations to
recognize the valuable work done by these
organizations for the citizens of the State.
Improvements in their accounting/financial
management systems allow them to provi de greater
benefits to our citizens. Entries for the year ended
December 31, 2001 were received from private
schools, private colleges and nonprofit hospitals.
Monitoring Compliance with New Economic
Development Laws — General Statute 158-7.1
requires municipalities and counties to report economic
development activities to the staff of the Local
Government Commission, and requires the
Commission to monitor their compliance within the
limits on economic development activities imposed by
the Statute. Municipalities and counties are required to
report these activities in their Annual Financial
Information Report. The staff then reviews the reports
to determine that units have complied with the Statute.
If it is discovered that a unit is in violation of the
requirements of that Statute, the municipality or county
must submit all appropriations and expenditures for
economic development activities to the Commission for
approval for the next three fiscal years.
Arbitrage Rebate Requirements for State
Bonds — In order to preserve the tax-exempt status of
the general obligation bond issues of the State that are
currently outstanding, the staff continues to perform
several tasks which are necessary to ensure
compliance with arbitrage regulations of the Internal
Revenue Service. The projects involve monitoring
investment yields, monitoring penalties in lieu of rebate
requirements, preparing monthly status reports on
each bond issue, and preparing information for use by
bond counsel and other outside professionals, who in
turn provide technical assistance to the staff.
Financial Reporting of Public School
Expenditures— Each year the staff prepares a report
for the General Assembly, the Department of Public
Instruction and other organizations on county funding
for public school capital outlays. This report is used in
analyzing the level of county spending for public
schools. In addition, the staff works with the
Department of Public Instruction on various accounting
issues to help ensure the proper accounting of current
expenses, capital outlay, and other issues.
Municipal Electric Systems — The staff, in
conjunction with the ElectriCities organization, has
been working with municipalities that operate electric
systems to help them identify ways to make their
electric rates more competitive with investor-owned
utilities. Because of

The State Treasurer’s
Annual Report
To The People of North Carolina
North Carolina
Department of State Treasurer
Fiscal Year 2001-2002
325 North Salisbury Street
Raleigh, North Carolina 27603-1385
1
To the People of North Carolina:
It is with pleasure that I submit to you the 2001-02 Annual Report for the
Department of the State Treasurer. I hope you find this useful in developing a
deeper understanding of the Department.
As the 13th popularly elected State Treasurer (and only the 3rd in 51 years), it is
both a great honor and a challenge to follow a long line of respected public servants
who have held this office. While the Department’s duties are varied and complex, our
mission is simple –preserving and protecting the fiscal integrity of our great State.
The Department of the State Treasurer is committed to maintaining North
Carolina’s hard-earned reputation for credit worthiness and continuing a
conservative and prudent investment strategy for the $62 billion in public funds
entrusted to us. So long as we maintain this commitment we will continue the
tradition of making sure that “good government is indeed a habit.”
With the help of wonderful colleagues, I look forward to continuing to serve the
people of North Carolina.
This report is available on our website www.nctreasurer.com and on disk. Please
call (919) 508-5176 or write the Department to request a copy.
Sincerely,
Richard H. Moore
North Carolina
Department of State Treasurer
RICHARD H. MOORE 325 NORTH SALISBURY STREET
STATE TREASURER RALEIGH, NORTH CAROLINA 27603-1385
Fax: (919) 508-5167 Phone: (919) 508-5176 website: www.treasurer.state.nc.us
The Department of State Treasurer includes Local Government Commission Teachers’ and State Employees’ Retirement System, Local Governmental Employees’
Retirement System, Public Employees’ Social Security Agency. Legislative Retirement Fund, Escheats Fund, and Tax Review Board.
An Affirmative Action/Equal Opportunity Employer
2
Table of Contents
LETTER OF TRANSMITTAL ............................................................................................................................................... 1
TABLE OF CONTENTS ......................................................................................................................................................... 2
STATE TREASURER
Table of Organization........................................................................................................................................................ 4
RETIREMENT SYSTEMS DIVISION
Operational Highlights ....................................................................................................................................................... 5
The Basic Functions .......................................................................................................................................................... 6
General Administration................................................................................................................................................. 6
Benefits Processing Section........................................................................................................................................ 6
Accounting/Data Control Section................................................................................................................................ 7
Retirees' Health Insurance..................................................................................................................................... 7
Direct Deposit Accounts/Address Changes.......................................................................................................... 7
Batch Posting and Systems Transfers .................................................................................................................. 7
Error Checking.......................................................................................................................................................... 7
Member Services Section............................................................................................................................................ 7
Records Section............................................................................................................................................................ 7
Significant Accomplishments
Legislation....................................................................................................................................................................... 8
Communications ............................................................................................................................................................ 9
Functional ....................................................................................................................................................................... 9
The Retirement Systems and Trust Funds
Actuarial Valuation........................................................................................................................................................ 10
Actuarial Assumptions .................................................................................................................................................. 10
Funding of the Systems................................................................................................................................................ 10
Funded Status................................................................................................................................................................ 11
Funded Ratio of the Retirement Systems .................................................................................................................. 11
Teachers' and State Employees' Retirement System of North Carolina............................................................... 12
Local Governmental Employees' Retirement System of North Carolina............................................................... 13
Consolidated Judicial Retirement System of North Carolina.................................................................................. 14
Teachers' and State Employees' Benefit Trust.......................................................................................................... 15
Firemen's and Rescue Squad Workers' Pension Fund........................................................................................... 16
Retirees' Health Premiums Fund................................................................................................................................ 16
Legislative Retirement Fund........................................................................................................................................ 17
Legislative Retirement System.................................................................................................................................... 17
Disability Income Plan.................................................................................................................................................. 17
Public Employees' Social Security Agency................................................................................................................ 17
National Guard Pension Plan...................................................................................................................................... 18
Supplemental Retirement Income Plan of North Carolina....................................................................................... 18
Registers of Deeds' Supplemental Pension Fund.................................................................................................... 18
STATE AND LOCAL GOVERNMENT FINANCE DIVISION
Operational Highlights ....................................................................................................................................................... 19
The State of Tax-Exempt Financing............................................................................................................................... 20
The Basic Functions
Debt Management......................................................................................................................................................... 21
Fiscal Management....................................................................................................................................................... 22
Significant Accomplishments
Debt Management......................................................................................................................................................... 23
North Carolina General Obligation Bonds............................................................................................................. 23
Installment and Lease Purchase Agreements ..................................................................................................... 23
Revenue Bonds ........................................................................................................................................................ 23
North Carolina Medical Care Commission Bonds ............................................................................................... 23
North Carolina Housing Finance Agency.............................................................................................................. 23
Industrial Revenue Bonds....................................................................................................................................... 24
Volume Cap Allocation............................................................................................................................................ 24
"Triple-A" General Obligation Bond Ratings ......................................................................................................... 24
North Carolina Educational Facilities Finance Agency....................................................................................... 24
North Carolina Clean Water Revolving Loan and Grant Funds ........................................................................ 25
Fiscal Management....................................................................................................................................................... 28
The North Carolina Capital Management Trust................................................................................................... 28
Review of Semi-annual Reports of Deposits and Investments ......................................................................... 28
Financial Section of Bond Offering Statements ................................................................................................... 28
Analysis of Official Pronouncements ..................................................................................................................... 28
State Treasurer’s conference on Local Government, Auditing and Financial Management
and Other Continuing Education Courses and Conferences ....................................................................... 28
Monitoring Compliance with “Yellow Book” Requirements ................................................................................ 29
3
Audit Manual for Governmental Auditors.............................................................................................................. 29
Audit Review Process ............................................................................................................................................. 29
Memoranda and Other Publications ...................................................................................................................... 29
State Treasurer's Governmental Accounting/Financial Management Awards Program ............................... 30
Monitoring Compliance with New Economic Development Laws ..................................................................... 30
Arbitrage Requirements for State Bonds .............................................................................................................. 30
Financial Reporting of Public School Expenditures............................................................................................. 30
Municipal Electric Systems..................................................................................................................................... 30
Monitoring Revenue Bond Compliance................................................................................................................. 31
Adherence to Continuing Disclosure Requirements of The Securities and Exchange Commission.......... 31
White Goods Disposal Tax..................................................................................................................................... 31
Compliance Supplements for Local Government Auditors ................................................................................ 31
Electronic Submission of the Report of Investments and Deposits.................................................................. 31
County and Municipal Information Website.......................................................................................................... 31
Projects in Progress
Internet Website............................................................................................................................................................. 31
The Town of East Spencer.......................................................................................................................................... 32
Monitoring the Impact of the State Budge Upon Cities and Counties ................................................................... 32
Policies Manual Update................................................................................................................................................ 32
Charter Schools ............................................................................................................................................................. 32
New Financial Reporting Model.................................................................................................................................. 32
Local Government Commission Expanded Oversight............................................................................................. 33
Qualified Zone Academy Bonds Authorized.............................................................................................................. 33
INVESTMENT MANAGEMENT DIVISION
Operational Highlights ....................................................................................................................................................... 34
Investment Management
Serving as the State's Chief Investment Officer........................................................................................................ 35
General Investment Objectives.............................................................................................................................. 35
Operating Policy....................................................................................................................................................... 35
The State Treasurer’s Investment Pool...................................................................................................................... 36
Cash Management Program ....................................................................................................................................... 37
Short-term Investment Portfolio............................................................................................................................. 38
Bond Proceeds Investment Pool........................................................................................................................... 40
Trust Funds Investment Program ............................................................................................................................... 40
Equity Investment Portfolio..................................................................................................................................... 41
Long-term Investment Portfolio.............................................................................................................................. 43
Real Estate Investment Portfolio ............................................................................................................................ 45
Alternative Investment Portfolio............................................................................................................................. 47
FINANCIAL OPERATIONS DIVISION
Banking Operations
Receiving State Moneys............................................................................................................................................... 50
Disbursing State Moneys ............................................................................................................................................. 51
Specialized Banking Functions ................................................................................................................................... 51
Bank Reconciliation Unit.............................................................................................................................................. 51
Statewide Operations ................................................................................................................................................... 51
Investment Accounting............................................................................................................................................ 51
Retirement and Escheat Fund Accounting........................................................................................................... 51
Departmental Operations ............................................................................................................................................. 51
ADMINISTRATIVE SERVICES DIVISION
Operational Highlights ....................................................................................................................................................... 52
Departmental Services ...................................................................................................................................................... 52
Personnel Management............................................................................................................................................... 52
Unclaimed Property Program........................................................................................................................................... 53
STATISTICAL TABLES — TABLE OF CONTENTS ........................................................................................................ A-1
4
North Carolina Department of State Treasurer
Table of Organization
Richard H. Moore
Treasurer
Joseph Stewart
Chief of Staff
Investment
Division
Andrew Silton
Deputy Treasurer
and Director
Financial
Operations Division
Mike Barham
Deputy Treasurer
and Director
State and Local
Government
Finance Division
Robert M. High
Deputy Treasurer
and Director
Administrative
Services Division
Kenneth C. Wilkins
Deputy Treasurer
and Director
Retirement
Systems Division
Michael Williamson
Deputy Treasurer and
Director
Information
Technology Division
Bill Golden
Deputy Treasurer and
Director
5
Retirement Systems
Division
The Retirement Systems Division of the
Department of State Treasurer administers the
statutory retirement and fringe benefit plans, as
authorized by the General Assembly of North Carolina,
which cover the State’s public employees. The
administration of the several retirement systems
requires a high level of fiduciary responsibility for the
employees’ trust funds with prudent, honest and
efficient use of employees’ and taxpayers’
contributions. The public purpose of the existence of
retirement systems and benefit plans is to recruit and
retain competent employees for a career in public
service, by providing a replacement income for
retirement, disability, or at death for an employee’s
survivors. The organizational structure herein shows
the functional arrangement of the tasks performed in
this Division.
Operational Highlights
· Presented recommendations and draft
legisl ation to the 2002 Session of the General
Assembly which resulted in the enactment of
laws to:
— provide cost -of-living adjustments equal to
1.4% to retirees of the Teachers’ and State
Employees’ Retirement System,
Consolidated Judicial Retirement System,
Legislative Retirement System and Local
Governmental Employees’ Retirement
System;
— increase the defined benefit accrual rate
from 1.81% to 1.82% in the Teachers’ and
State Employees’ Retirement System and
the Local Governmental Employees’
Retirement System with a corresponding
benefit adjustment to retirees equal to 0.6%;
— allow retired members of the Teachers’ and
State Employees’ Retirement System to be
reemployed to teach in public schools
without earnings restrictions until July 1,
2004 under certain circumstances;
— modify reemployment earnings restrictions
in the Teachers’ and State Employees’
Retirement System and Local Governmental
Employees’ Retirement System during the
12-month period immediately following the
effective date of retirement;
— amend the retirement statutes to conform to
provisions of the Economic Growth and Tax
Relief Reconciliation Act of 2001; as a result
of this legislation, effective January 1, 2003,
pre-tax money from an eligible retirement
plan or IRA may be accepted to purchase
creditable service;
— amend withdrawn service purchase
provisions in the Local Governmental
Employees’ Retirement System for
purchases on and after January 1, 2003;
— increase the monthly benefit payment to
beneficiaries of the Firemen’s and Rescue
Squad Workers’ Pension Fund from $151.00
to $156.00 per month.
· Processed benefits for 10,261 new retirees.
· Processed refunds for 19,823 former employees.
· Established approximately 48,072 new active
member accounts.
· Increased utilization of direct deposit of monthly
benefit payments from 139,000 to approximately
147,000 retirees.
· Continued the development and testing of the
Disability Automation System. This project is
ongoing.
· Remodeled the Accounting, Benefits and
Records Sections with new carpet, paint, and
work stations.
· Installed new computers for each employee.
· Updated the Retirement Systems Division
Section of the State Treasurer’s Web page
(www.treasurer.state.nc.us) to include the most
currently revised editions of retirement forms,
handbooks, and the Frequently Asked
Questions.
· Added a map and directions to Retirement
System offices to Web page.
· Added a Legislation Highlights summary to Hot
Topics section on the Web page.
· Completed installation of new electronic
document management system (imaging
system) in June, 2002.
Board of
Trustees
Michael Williamson
Director
Actuary
Deputy
Director
Deputy
Director
Research
and
Planning
Member
Services
Section
Benefits
Processing
Section
Accounting
Data Control
Section
Fire and
Rescue
Benefits
Records
Section
Policy
Director
External
Relations
Director
6
The Basic Functions
The retirement systems administered by this
Division are the:
• Teachers’ and State Employees’ Retirement System
• Local Governmental Employees’ Retirement System
• Consolidated Judicial Retirement System
• Legislative Retirement System
The systems are governed by two boards of
trustees. The State Treasurer is ex-officio chairman of
each board. The board of the Teachers’ and State
Employees’ Retirement System is composed of 14
members, including actively working employees,
retirees and public members. The Local Governmental
Employees’ Retirement System Board, while legally
separate, is composed of the same 14 members plus 3
members representing local governments. The Board
of Trustees of the Teachers’ and State Employees’
Retirement System is the governing board of the
Consolidated Judicial and Legislative Retirement
Systems and all of the other programs listed herein,
except for the Firemen’s and Rescue Squad Workers’
Pension Fund. That fund is governed by a board of
trustees, of which the State Treasurer is ex-officio
chairman, and is composed of six members, including
actively working employees, volunteers, and a public
member.
In addition to the retirement systems administered
through this Division, responsibility for administration of
other programs covers the:
• Firemen’s and Rescue Squad Workers’ Pension
Fund
• Public Employees’ Social Security Agency
• Disability Income Plan
• Legislative Retirement Fund
• National Guard Pension Plan
• Teachers’ and State Employees’ Benefit Trust
• Supplemental Retirement Income Plan
• Registers of Deeds’ Supplemental Pension Fund
• Contributory Death Benefit for Retired Members
All retirement systems and other programs
administered by this Division are operated on a
calendar year basis from January 1 to December 31,
rather than the State’s fiscal year, except for the
Firemen’s and Rescue Squad Workers’ Pension Fund.
For this reason, much of the data shown for the
Division is for the captioned year ending December 31.
The administrative expenses of the Division for the
retirement systems are paid from the General Fund of
the State. These costs are reimbursed monthly to the
General Fund from the assets of each trust fund
benefited, in proportion to the estimated benefit
received.
General Administration
The Director and his immediate staff are
responsible for the overall general operation of the
Division, and carry out the policies and directives of the
State Treasurer and the governing boards. They
provide assistance to legislators and committees of the
General Assembly, including the drafting of proposed
legislation and the acquisition of actuarial notes for
introduced bills; response to news media inquiries;
action and administrative appeals by individual
members of the retirement systems; a working
relationship with associations and organizations of
employees and employers; and information to State
departments, agencies, institutions, and local
governments. The staff provides assistance to local
governments for Social Security coverage and acts as
liaison between the State and the Social Security
Administration. The staff also performs planning and
research functions, and directs special projects.
Benefits Processing Section
This Section is responsible for the determination of
eligibility for monthly retirement allowances and
processing payment of all benefits for all retirement
systems governed by the boards of trustees and
administered by this Department. Responsibilities
include the calculation and processing of payments of
all retirement allowances under the various systems.
For the period July 2001 through June 2002, 10,261
retirements were processed for payment.
The administration and determination of disability
benefits through the System’s Medical Board under the
provisions of the Disability Income Plan for teachers
and State employees, and the determination of
eligibility for disability benefits from the other retirement
systems are incumbent upon this Section.
Approximately 5,172 disability claims were reviewed by
the Medical Review Board during the 2001-2002 fiscal
year. Responsibilities include the calculation and
payment of monthly disability benefits as well as the
calculation and payment of reimbursements for short -
term disability benefits paid by the various employers
under the provisions of the Plan. Reimbursements
numbering 273 were issued from July 2001 through
June 2002 totaling $1,966,410.
The various death benefit programs related to the
Retirement Systems and the Separate Insurance
Benefits Fund are managed by this Section.
Responsibilities include the calculation and payment of
7
death benefits, return of members’ contributions,
survivor’s alternate benefits, and other lump sum
payments. Beneficiary changes for deceased retired
members who selected an optional payment plan at
retirement that provides for a beneficiary after the
death of the member are handled in this Section.
Approximately 6,505 death reports were received and
processed during this period.
This Section is also responsible for the calculation
and the payment of returns of accumulated
contributions to terminated employees. A total of
19,823 refunds were processed for the period July
2001 through June 2002.
The calculation of service purchase costs under
the provisions of the various retirement systems
administered by the Division is performed by this
Section. In excess of 11,233 cost calculations were
generated by the Benefits Processing Section for the
period July 2001 through June 2002.
Accounting/Data Control Section
Maintaining the accounting records for the retirement
systems is the responsibility of this Section. Another
major responsibility is receiving and processing payroll
contribution reports from some 1,600 participating
State and local units of government. Contribution
information from these payroll reports is electronically
posted to the individual accounts for more than
415,000 members.
This Section is responsible for the administration of
the Contributory Death Benefit Plan for Retired
Members including the notification of eligibility under
the Plan, enrollment of members electing coverage,
and collection of the required contributions.
Brief descriptions of the other functions performed
by this Section are as follows:
• Retirees’ Health Insurance — Duties pertaining
to this program include the receipt and processing
of enrollment applications, and coverage change
requests for more than 110,000 retirees.
• Direct Deposit Accounts/Address Changes —
Activities involved in these areas relate to the receipt
and processing of Electronic Funds Transfer (EFT)
account applications, and changes to direct
deposit accounts. Approximately 147,000 retirees’
benefits are processed through EFT. Also, over
9,000 address change requests for retirees were
processed in this Section.
• Batch Posting and Systems Transfers —These
duties consist of the deposit and recording of
special member contributions, and transfer of
funds between systems.
• Error Checking — The correction of errors
detected by computer edit in the processing of
employers’ payroll reports is an important function
of the Section. Over 47,000 errors were detected
and corrected this past year.
Member Services Section
This Section handles written correspondence,
telephone communications, and e-mail inquiries with
members and employers participating in the retirement
systems and other benefit programs, responding to a
multitude of questions about fringe benefits.
Accordingly, during the past year approximately 42,964
letters were written in this Section, approximately
13,206 e-mail inquiries were addressed, and
approximately 312,132 telephone communications
were handled by personal contact with an additional
52,350 handled by the Interactive Voice Response Unit
(IVR Unit). In addition, annual pre-retirement planning
seminars are conducted by the staff of this Section, as
well as retirement and fringe benefit conferences at the
request of employers, and employee associations. All
visitors to the Division requiring individual counseling
about their benefits are referred to this Section. More
than 9,817 persons were interviewed during the past
12 months.
The calculation of monthly retirement benefit
estimates for future retirees is also a duty of this
Section. Responsibilities include service and salary
projections to an anticipated date of retirement.
Another important function of this Section is
coordinating the participation of local government
employers electing to become members of the Local
Governmental Employees’ Retirement System. This
involves meetings with local governing bodies,
collecting data for transmission to the Systems’
consulting actuary, enrollment of eligible employees
and explanation of monthly reporting procedures.
Ancillary to this function is assistance to local
governments in the adoption of tax shelter and death
benefit coverage agreements. During the past year, 5
local government employers elected to become
participants, and cons equently their employees were
enrolled in the Local Governmental Employees’
Retirement System.
Records Section
The Records Section is primarily responsible for
the creation, maintenance and storage of files for
individuals who are currently, or have been at one
time, members of any of the State-administered
retirement systems.
The Records Section currently maintains
approximately 1,216,618 records. These records,
8
heretofore, had been maintained in the form of
jacketed microfiche and stored in seven power file
cabinets in the Records Section.
The records retention and storage functions have
completely changed since January 1, 1996, with the
implementation of the Division’s electronic document
management system (imaging system). All active and
retired member jacketed microfiche records have been
converted to the imaging system, while all new records
plus updates to existing files are now automatically
processed as digital images. Over 12.3 million images
have been converted to the imaging system.
The Division completed installation of a new
imaging system with advanced capabilities in June,
2002.
Significant Accomplishments
Legislation
Prior to the convening of the 2002 Session of the
General Assembly, the Director and staff identified all
proposals for benefit enhancements and changes
recommended by the various associations of
educators, employees and retirees. Also identified
were measures to enhance administrative ability. Cost
estimates for the recommendations were acquired from
the Division’s consulting actuary. The staff then
assisted the State Treasurer and the Retirement
Systems’ Boards of Trustees in the formulation of their
legislative recommendations.
During the 2002 Session, the Director and staff
provided technical assistance and bill drafting services
for the standing Senate and House Committees on
Pensions and Retirement and communicated the
Boards of Trustees’ recommendations. The staff also
acquired, as provided by State law, 38 actuarial notes
disclosing the fiscal impact of every bill introduced
which affected a State-administered retirement system
or pension plan.
Recommendations of benefits and administrative
enhancements by the board of trustees which were
acted upon favorably by the General Assembly were
to: (1) provide, effective July 1, 2002, in the Teachers’
and State Employees’ Retirement System, a 1.4%
post-retirement increase in the allowances of
beneficiaries in receipt of allowances on and before
July 1, 2001, and for beneficiaries who commenced
retirement with effective dates of August 1, 2001 to
June 1, 2002, a prorated portion of the 1.4% post-retirement
increase in their allowances based on the
number of months a retirement allowance was paid; (2)
provide, effective July 1, 2002, in the Local
Governmental Employees’ Retirement System, a 1.4%
post-retirement increase in the allowances of
beneficiaries in receipt of allowances on and before
July 1, 2001, and for beneficiaries who commenced
retirement with effective dates of August 1, 2001 to
June 1, 2002, a prorated portion of the 1.4% post-retirement
increase in their allowances based on the
number of months a retirement allowance was paid; (3)
provide, effective July 1, 2002, in the Consolidated
Judicial Retirement System, a 1.4% post-retirement
increase in the allowances of beneficiaries in receipt of
allowances on and before July 1, 2001, and for
beneficiaries who commenced retirement with effective
dates of August 1, 2001 to June 1, 2002, a prorated
portion of the 1.4% post-retirement increase in their
allowances based on the number of months a
retirement allowance was paid; (4) provide effective
July 1, 2002, in the Legislative Retirement System, a
1.4% post-retirement increase in the allowances of
beneficiaries in receipt of allowances on and before
January 1, 2002, and for beneficiaries who
commenced retirement with effective dates of February
1, 2002 to June 1, 2002, a prorated portion of the 1.4%
post-retirement increase in their allowances based on
the number of months a retirement allowance was
paid; (5) increase, effective July 1, 2002, the defined
benefit formula accrual rate in the Teachers’ and State
Employees’ Retirement System from 1.81% to 1.82%
of a member’s average final compensation multiplied
by a member’s creditable service for service and early
retirements; (6) provide for an adjustment, on account
of the above defined benefit formula increase, to or on
account of beneficiaries on the Teachers’ and State
Employees’ Retirement System retirement roll as of
June 1, 2002, equal to 0.6% of their June allowances;
(7) increase, effective July 1, 2002, the defined benefit
formula accrual rate in the Local Governmental
Employees’ Retirement System from 1.81% to 1.82%
of a member’s average final compensation multiplied
by a member’s creditable service for service and early
retirements; (8) provide for an adjustment, on account
of the above defined benefit formula increase, to or on
account of beneficiaries on the Local Governmental
Employees’ Retirement System retirement roll as of
June 1, 2002, equal to 0.6% of their June allowances;
(9) permit retired members of the Teachers’ and State
Employees’ Retirement System to be reemployed to
teach in public schools without earnings restrictions.
This provision is effective until July 1, 2004 and applies
only to members who have been retired at least 6
months and have not been employed in any capacity,
except as a substitute teacher or part-time tutor, with a
public school for at least 6 months immediately
preceding the effective date of re-employment; (10)
amend, effective January 1, 2003, withdrawn service
purchase provisions in the Local Governmental
Employees’ Retirement System, to provide that after
five years of membership service, the service credit
under the withdrawn account may be restored upon
repayment of the amount withdrawn plus interest at the
rate of 6½% compounded annually from the year of
withdrawal to the year of repayment, plus a $25.00
administrative fee; and (11) amend the retirement
statutes to conform to provisions of the Economic
Growth and Tax Relief Reconciliation Act of 2001; as a
9
result of this legislation, effective January 1, 2003, pre-tax
money from an eligible retirement plan or IRA may
be accepted via rollover or in-service plan-to-plan
transfer to purchase creditable service in the Teachers’
and State Employees’ Retirement System, Local
Governmental Employees’ Retirement System,
Consolidated Judicial Retirement System, and
Legislative Retirement System.
The cost of these amendments in the affected
retirement systems was funded by the gains realized
from favorable investment and actuarial experience of
each.
Communications
The Research and Planning Officer, in conjunction
with other staff, revised forms for purposes of: notice of
enrollment in the Consolidated Judicial Retirement
System, election of benefits in the Consolidated
Judicial Retirement System, election of benefits in the
Legislative Retirement System, purchase of withdrawn
service in the Teachers’ and State Employees’
Retirement System, application for retirement, retired
group health insurance enrollment, and medical report
for disability benefits. The “Things Retirees Need to
Know” pamphlet was also updated.
Seven brochures describing the plan provisions of
the Teachers’ and State Employees’ Retirement
System, Local Governmental Employees’ Retirement
System, Consolidated Judicial Retirement System, the
Firemen’s and Rescue Squad Workers’ Pension Fund,
and Legislative Retirement System were revised in
January, 2002 and updated on the Web page.
In addition, a Legislation Highlights summary was
added to the Hot Topics section on the Web page, and
a map and directions to the Retirement System office
was added to the Web page.
Subsequent to adjournment of the General
Assembly, a digest of all legislative changes was
provided to all employing units, including some 1,800
fire departments and rescue squad units, and various
employee associations. In addition, Divisional staff
contributed various articles which were published in the
publications of the State Employees’ Association, the
Retired Governmental Employees’ Association, and
other organizations.
The staff of the Member Services Section
periodically works with the staff of the State Agency for
Public Telecommunications in revising the video
programs utilized by the State and Local retirement
systems. These programs, which can be used by
anyone to explain the basic benefits structure of those
retirement systems, are especially suited to the
informational requirements of members nearing
retirement age. Videos are used in the Division’s
statewide pre-retirement counseling meetings which
are publicized throughout the State by the press, radio,
and television. In the spring of 2002, the Member
Services staff conducted 10 pre-retirement meetings
statewide with some 3,570 members in attendance. In
addition, the staff also participated in 93 other
meetings, seminars, benefit fairs, and conferences
relating to retirement benefits, including PREPARE
workshops with 8,746 attendees.
The PREPARE workshop program was a joint
venture with the Office of State Personnel and the
community college system. This program covered
legal, health, financial, housing, and family aspects of
retirement.
Functional
The Division has continued to promote direct
deposit of monthly benefit payments. Between July 1,
2001 and June 30, 2002, the benefit payments of
7,039 retirees were added to the direct deposit group,
bringing the total number of monthly payments made
by direct deposit to 146,921. This means that about
90% of the monthly benefit payments made by the
Department are on direct deposit. The annualized
savings to the State, relative only to the benefit
payments placed on direct deposit during the twelve-month
period ended June 30, 2002, is estimated to be
approximately $25,000.
The Firemen’s and Rescue Squad Workers’
Pension Fund implement ed a new system to allow
volunteer fire departments to submit their rosters of
members electronically.
In the Local Governmental Employees’ Retirement
System, 5 local governments elected to become
participating employers with the System. The
participation of these employers involved the staff of
the Member Services Section in meeting with their
governing bodies and employees, acquiring
prevaluations from the consulting actuary to determine
an employer’s contribution rate, and providing all legal
documents and agreements for their execution.
During this past year progress continued in the
enhancement of computer programs utilized by the
Benefits Processing System to provide timely and
accurate service to the membership of the Retirement
System.
· Continued the development and testing of the
Disability Automation System. This project is
ongoing.
· Began converting Excel spreadsheets that were
serving as databases to actual databases, thereby
providing for multiple simultaneous updates and
user access. This project is ongoing.
Each of the foregoing were important steps in the
Division’s ultimate goal of automating, to the greatest
possible extent, all activities relating to the processing
and payment of benefits.
10
The Division continued the conversion of member
withdrawn account records that were on microfilm to
digital images.
The enrollment of members function and the
change of beneficiaries function now being processed
as digital images in the electronic document
management system have been further refined so as
to permit faster processing. The Division installed a
new electronic document management system
(imaging system) with advanced capabilities in June,
2002.
Implementation of the new imaging system is not
the final step in the automation process for the
Department. Additional initiatives, such as optical
character recognition and bar coding will allow
information to be read by the imaging system from
paper. Payroll history and other historical information
may eventually be stored on the imaging system in
order to provide faster access. The new system is
flexible and expandable such that new users and
applications may be added. To date, most of the
various retirement processes have been incorporated
in automated workflows.
The office receives numerous ve rbal and written
requests for information, from both attorneys and the
general public, as to how the retirement law impacts
individual members and their spouses with respect to
the equitable distribution of their retirement income.
Attorneys are required to submit proposed Domestic
Relations Orders to the Retirement System for review
by the Attorney General’s office before any payment of
retirement income can be made to a member’s ex -
spouse in a divorce situation. The office continues to
process these requests on a timely basis, thereby
providing financial certainty to all parties involved.
The Lotus program that handles equitable
distribution affidavits has a real and direct benefit to the
members and their ex-spouses by providing them up to
the minute information as to the status of a member’s
account and the financial consequences of a divorce
action, thus assisting them and the courts in
determining the fair and equitable distribution of a
member’s retirement income.
The Retirement Systems and Trust Funds
Actuarial Valuation
The actuarial valuation is prepared by an actuary
to assess the funding progress of a retirement system
and the adequacy of the contribution rates which have
been established to fund the system. An actuarial
valuation is an inventory of the assets and liabilities of
a retirement system at a specific point in time.
Information collected covers all of the active (both in-service
and terminated) members and all of the retired
members and other beneficiaries who are receiving
benefit payments. In this way, everyone who has been
promised a benefit from the system is included in the
actuarial calculations to determine the present value of
the system’s liabilities. These liabilities are then
compared to the system’s assets, and calculations are
made to determine whether the contribution rates will
be adequate to fund the uncovered liabilities in the time
period originally established. Annual valuations are
made to permit gradual changes in the contribution
level and/or funding period and keep the funding on a
proper course. The annual valuation is also used by
the actuary to compare actual separation,
compensation, and investment experience with the
actuarial assumptions used in the valuation of the
liabilities of the system. The actuarial valuation balance
sheets for each retirement system are included with
the tables.
Actuarial Assumptions
The economic assumptions used for the actuarial
valuation of all retirement systems are an interest rate
of 7.25% per year and average rates of salary increase
of about 6.00% per year, varying at different ages. The
assumed rates for mortality, withdrawals, disabilities,
and service retirements are based on actual past
experience. The asset valuation method is based on a
modified market related value.
Funding of the Systems
The retirement systems described in this report,
except the Legislative Retirement System, are being
funded on a full actuarial reserve basis and use the
entry age normal cost method as the actuarial cost
approach. Under the entry age normal cost method,
the normal contribution percentage rate is calculated
on the basis of the adopted actuarial assumptions as
the level percentage of the compensation of the
average new member which, if contributed throughout
the entire period of active service, would be sufficient,
together with his/her contributions, to support all the
benefits payable on his/her account. The accrued
liability is the difference between total liabilities and the
present value of future normal cost contributions and
the members’ future contributions. All experience gains
and losses are reflected in the amount of the unfunded
accrued liability and thereby affect the period of
liquidation, except in the Local Governmental
Employees’ Retirement System, where they are reflected
in the normal contribution rate. The Legislative
Retirement System is also being funded on a full
actuarial reserve basis, but uses the projected unit
credit cost method with unfunded accrued liability as
the actuarial cost approach.
11
All retirement systems are joint contributory,
defined benefit plans with contributions made by both
employees and employers. Each active member
contributes 6% of his/her compensation for creditable
service by monthly payroll deduction. The only
exception to this member contribution rate is the
Legislative Retirement System to which each active
member contributes 7% of his/her compensation.
Employers make monthly contributions based on a
percentage rate of the members’ compensation for the
month. Employer contribution rates are actuarially
calculated.
Funded Status
The consistent use of conservative actuarial
assumptions and an approved actuarial cost method
over the years since the establishment of the
retirement systems, and the recognition of all promised
benefits in the actuarial liabilities, have resulted in
retirement systems which can be labeled as
“actuarially sound.” A simple measure for determining
the funded status of a system is to relate the total
present assets to total accrued liabilities to determine a
funded ratio.
The total accrued liabilities are found by adding the
assets and the unfunded accrued liabilities. For
purposes of comparison, the funded ratios for the
major retirement systems are graphically illustrated in
Chart 1. When the ratio equals 100%, a system is
considered to be “fully funded” on a current basis.
Chart 1
Funded Ratio
of the Retirement Systems
98.9% 99.4%
106.4% 112.8% 111.6%
99.1% 99.2% 99.2% 99.3% 99.3%
104.3%
100.3%
107.6% 108.4% 108.9%
0
10
20
30
40
50
60
70
80
90
100
1997 1998 1999 2000 2001
Teachers' and State
Employees'
Retirement System
Local Governmental
Employees'
Retirement System
Consolidated
Judicial
Retirement System
1998
1997
1998 1999 2000 2001 1997 1998 1999 2000 2001
12
Teachers’ and State Employees’ Retirement
System of North Carolina (State System)
N.C.G.S. 135-1 Through 135-18.5
The Teachers’ and State Employees’ Retirement
System has the largest assets and membership of the
retirement systems administered by the Division.
Created by the General Assembly effective July 1,
1941, the State System provides benefits to all full-time
teachers and State employees in all public school
systems, universities, departments, institutions, and
agencies of the State.
This System began operations with a membership
of 42,878 teachers and State employees, and with
appropriations from the State of $1,838,000. The
membership has grown over the years in proportion to
the growth in size and complexity of the public schools
and State government. The active membership at
December 31, 2001 was 349,340, and in addition there
were 112,482 retired members and beneficiaries of
deceased retired members. Invested assets at market
value amounted to about $44.0 billion.
The distribution of the investments of the assets of
the State System as of December 31, 2001 was:
Long-Term Fixed Income
Investment Fund $18,413,935,278
Short-Term Fixed Income
Investment Fund 155,690,328
Real Estate Investment Fund 1,237,620,739
Equity Investment Fund 24,148,376,315
Venture Capital 70,507,495
Total $44,026,130,155
Operations of the State System during the calendar
year 2001 resulted in total receipts of $(7,788,463) and
total expenditures of $1,852,139,484. Chart 2 presents
the distribution of revenues by source and expenditures
by purpose.
The latest Actuary’s Valuation Balance Sheet for
the State System, as of December 31, 2001, is shown
in Table 11. Based on the latest actuary’s report, the
General Assembly set the employer contribution rate at
1.97% of covered payroll, effective July 1, 2001, and at
.00% of covered payroll, effective July 1, 2002. On this
basis, the total of employee and employer rates of
contribution is adequate to fund all future benefits
presently authorized, based on current service, and to
fund, over a period of 9 years from January 1, 2002,
the remaining accrued liability for past service.
Chart 2
Teachers’ and State Employees’
Retirement System of North Carolina
Year Ended December 31, 2001
Sources of Funds
Employee Contributions $606,695,436
Employer Contributions $224,705,629
Other Income $ 1,591,915
Investment Income ($840,781,443)
Applications of Funds
Retirement Benefits $1,769,822,982
Refunds $ 74,303,196
Administrative Expenses $ 7,940,299
Other Expenses $ 73,007
Addition to Reserves
For Future Benefits ($1,859,927,947)
13
Local Governmental Employees’ Retirement
System of North Carolina (Local System)
N.C.G.S. 128-21 Through 128-38
The Local System is maintained for the employees
of cities, towns, counties, boards, commissions, and
other entities of local government in North Carolina.
Because participation by local governments is
voluntary, the operation of the Local System is
dependent upon the acceptance and continuing
financial support of the governing bodies and
employees of local governments. Approval and
acceptance are evidenced by the fact that as of
December 31, 2001, a total of 879 cities, towns,
counties, and local commissions were participating in
the Local System.
This System began operations in 1945, with 18
participating local governments, 2,102 members, and
assets of $178,053. The active membership as of
December 31, 2001 was 134,679; in addition there
were 31,352 retired members and beneficiaries of
deceased members. Invested assets at market value
amounted to about $11.4 billion.
The distribution of investments of the assets of the
Local System as of Dec ember 31, 2001 was:
Long-Term Fixed Income
Investment Fund $4,956,185,382
Short-Term Fixed Income
Investment Fund 16,873,206
Real Estate Investment Fund 327,634,716
Equity Investment Fund 6,101,349,739
Venture Capital 17,739,482
Total $11,419,782,525
Operations of the Local System during the
calendar year 2001 resulted in total receipts of
$221,536,949 and total expenditures of $434,822,183.
Chart 3 presents the distribution of revenues by source
and expenditures by purpose.
The latest Actuary’s Valuation Balance Sheet for
the Local System, as of December 31, 2001, is shown
in Table 12.
Based on the actuary’s latest report, the Board of
Trustees set the employer normal contribution rate at
4.80% of covered payroll for general employees and at
5.27% of covered payroll for law enforcement officers,
effective July 1, 2002. The accrued liability rate, if any,
varies with each employing unit depending on the
amount of prior service that was awarded to the
members.
In accordance with the provisions of the legislation
that caused the merger of the Law Enforcement
Officers’ Retirement System and the Local
Governmental Employees’ Retirement System on
January 1, 1986, the normal contribution rates are
separate for each of the two groups of employees
while the accrued liability rate is the same.
Chart 3
Local Governmental Employees’
Retirement System of North Carolina
Year Ended December 31, 2001
Sources of Funds
Employee Contributions $226,787,046
Employer Contributions $187,962,135
Other Income $ 4,722,944
Investment Income ($197,935,175)
Applications of Funds
Retirement Benefits $378,766,233
Refunds $ 53,185,486
Administrative Expenses $ 2,842,905
Other Expenses $ 27,559
Addition to Reserves
For Future Benefits ($213,285,233)
14
Consolidated Judicial Retirement System
of North Carolina (Judicial System)
N.C.G.S. 135-50 Through 135-72
The Judicial System was created by the 1983
Session (Regular Session, 1984) of the General
Assembly, effective January 1, 1985. This System was
formed by combining the previously existing Uniform
Judicial, Uniform Solicitorial, and Uniform Clerks of
Superior Court Retirement Systems. The Courts
Commission was responsible for the design of the
benefit structure of the previous systems, which was
carried forward to the new consolidated system.
The membership of the Judicial System is
composed of the elected judges and justices, district
attorneys, and clerks of superior court of the General
Court of Justice. As of December 31, 2001, there were
487 active members and 382 retired members and
beneficiaries of deceased retired members. The
invested assets at market value were about $331.4
million.
The distribution of the investments of the Judicial
System as of December 31, 2001, was:
Long-Term Fixed Income
Investment Fund $139,678,979
Short-Term Fixed
Investment Fund 2,878,904
Real Estate Investment Fund 9,386,208
Equity Investment Fund 179,001,247
Venture Capital 484,413
Total $331,429,751
Operations of the Judicial System during the
calendar year 2001 resulted in total receipts of
$3,255,278 and total expenditures of $15,965,627.
Chart 4 presents the distribution of revenues by source
and expenditures by purpose.
The latest Actuary’s Valuation Balance Sheet for
the Judicial System, as of December 31, 2001, is
shown in Table 13. Based on the actuary’s latest
report, the General Assembly set the employer
contribution rate at 13.92% of covered members’
payroll, effective July 1, 2002. On this basis, the total of
member and employer rates of contribution is more
than adequate to fund all future benefits presently
authorized based on current service.
Chart 4
Consolidated Judicial
Retirement System of North Carolina
Year Ended December 31, 2001
Sources of Funds
Employee Contributions $3,243,975
Employer Contributions $5,963,188
Investment Income ($5,951,885)
Applications of Funds
Retirement Benefits $15,904,755
Refunds $ 37,012
Administrative Expenses $ 23,860
Addition to Reserves
For Future Benefits ($12,710,348)
15
Teachers’ and State Employees’ Benefit Trust
(Benefit Trust)
N.C.G.S. 135-5(I) ; 128-27(I); 143-166.20; And 143-166.60
The Benefit Trust was established January 1,
1980, by the Board of Trustees of the Teachers’ and
State Employees’ Retirement System, after enabling
legislation was enacted in the 1979 Session of the
General Assembly. The Board of Trustees of the Local
Governmental Employees’ Retirement System elected
to become a participating affiliate in the Trust at the
same date. The purpose of the Benefit Trust is to
provide group life insurance benefits for members of
these two retirement systems. Formerly, identical type
death benefits were provided directly by these
retirement systems.
All contributions to fund life insurance benefits are
paid by the State and local governments, participating
in one of the two retirement systems, to the Trust and
held separate and apart from any pension or retirement
funds. The funding method adopted for the Benefit
Trust is one-year term cost. The employ er contribution
rate to fund this benefit for members of the Teachers’
and State Employees’ Retirement System is .16% of
covered payroll. The employer contribution rate for
members of the Local Governmental Employees’
Retirement System is actuarially determined and varies
among employers.
The Benefit Trust further includes the Separate
Insurance Benefits Plan for State and Local
Governmental Law Enforcement Officers. The Plan
provides additional life insurance benefits to active and
retired law enforcement officers and additional accident
and sickness insurance coverage for law enforcement
officers. These benefits are funded by a $1.00 cost-of-court
assessment in each criminal case conviction in
the State.
Additionally, the Benefit Trust includes the Retiree
Death Benefit Plan. This plan is funded by participant
contributions. The benefit is $6,000 after 24 months of
contributions. If a participant’s death occurs before 24
months of contributions, the benefit is limited to a
refund of contributions.
Chart 5 graphically presents the distribution of
revenues by source and expenditures by purpose. The
number of deaths and amounts of benefit payments,
according to member group, during 2001 were:
Life Insurance Payments
Calendar Year 2001
Retirement System Number of Payment
Membership Payments Amount
Teachers’ and State Employees’ 467 $16,469,639
Local Governmental Employees’ 127 2,563,531
Chart 5
North Carolina Teachers’
and State Employees’ Benefit Trust
Year Ended December 31, 2002
Sources of Funds
Applications of Funds
State Death
Benefits Paid
$16,469,639
44.9%
Addition to
Reserves for
Future Benefits
$10,882,331
29.6%
Retirees' Death
Benefits Paid
$5,615,824
15.3%
Local Death
Benefits Paid
$2,563,531
7.0%
Death Benefits
and Insurance
Paid SIF
$926,655
2.5%
Administrative
Expenses
$270,507
.7%
Teachers' and
State Employees'
Retirement System
$8,276,415
22.5%
Retirees'
Death Benefit
$7,770,664
21.2%
Investment
Income
$15,971,066
43.5%
Local Governmental
Employees'
Retirement System
$3,519,485
9.6%
Separate
Benefits Fund
$1,190,852
3.2%
Legislative
Retirement System
$0
0%
16
Firemen’s and Rescue Squad Workers’ Pension Fund
(Pension Fund)
N.C.G.S. 58-86-1 Through 58-86-90
The Pension Fund was created by the 1959
Session of the General Assembly to provide benefits
for certified firemen. The statutes were amended to
include certified rescue squad workers beginning
January 1, 1982. Both volunteer and paid personnel
are included in the membership.
Funded by an initial appropriation of $235,000,
retroactive benefit payments amounting to $210,700
were made to 362 retirees during August of 1962, to
cover all benefits due and payable since July 1, 1961.
At June 30, 2002, the active membership of the fund
was 31,492 while the number of retired members was
8,619. Invested assets at book value amounted to
about $242.9 million.
The distribution of the investments of the assets as
of June 30, 2002, was:
Long-Term Fixed Income
Investment Fund $ 112,928,873
Short-Term Fixed Income
Investment Fund 709,036
Real Estate Investment Fund 7,179,066
Equity Investment Fund 121,706,059
Venture Capital 330,683
Total $ 242,853,717
Operations of the Pension Fund during the 2002
fiscal year resulted in total receipts of $4,129,293 and
total expenditures of $16,564,173. Chart 6 presents the
distribution of revenues by source and expenditures by
purpose.
The latest Actuary’s Valuation Balance Sheet, as
of June 30, 2001, is shown in Table 14. Based on the
latest actuary’s report, the General Assembly
appropriated $10,026,897 for the 2001-02 fiscal year.
The yearly appropriation will fund all future benefits,
based on current service, and will fund, over a period
of nine years from June 30, 2001, the remaining
accrued liabilities for past service.
Chart 6
Firemen’s and Rescue Squad Workers’
Pension Fund
Year Ended June 30, 2002
Sources of Funds
Appropriation $10,026,897
Member Contributions $ 4,196,356
Investment Income ($ 5,951,885)
Other Income $ 52
Applications of Funds
Pension Benefits $15,385,672
Refunds $ 570,758
Administrative Expenses $ 607,742
Addition to Reserves
For Future Benefits ($12,434,880)
Retirees’ Health Premiums Fund
This fund is used as a conduit of moneys flowing
from employers to pay individual coverage cost of
retirees’ health insurance. This coverage can be under
either the State’s health plan or approved health
maintenance organizations. Retirees from the
Teachers’ and State Employees’, Consolidated
Judicial, and Legislative Retirement Systems are
eligible for coverage. The method of collecting the
employers’ payments is a surcharge on active
members’ payroll payable with the employer
contribution rate to the affected retirement system.
Financial Information for 2001
Beginning Fund Balance $87,960,591
Additions:
Employer Contributions $ 188,228,165
Investment Income 0 188,228,165
Deductions:
Health Premiums Paid $ 216,891,616
Administrative Expense 165,804 217,057,420
Ending Fund Balance $59,131,336
17
Legislative Retirement Fund (Fund)
N.C.G.S. 120-4.1 Through 120-4.2
The Fund was created by the 1969 Session of the
General Assembly as a retirement plan for members
and elected officers of the North Carolina General
Assembly. The Fund was abolished, prospectively, by
the 1973 Session (Second Session 1974). The
abolishing Act preserved the vested and inchoate
rights of the members in the Fund so that all members
and former members of the General Assembly, who
had qualified by virtue of service as of 1974, are still in
receipt of monthly allowances or may apply for and
receive monthly allowances at age 65. There were 30
former members and officers of the General Assembly
in receipt of allowances, with a cost in the year ended
December 31, 2001, of some $43,500. The cost is
funded by a contribution of 5% of compensation paid
by members at retirement and an annual general fund
appropriation made to the General Assembly. The
Fund is not operated as a retirement fund, but as an
expendable trust fund.
Legislative Retirement System (System)
N.C.G.S. 120-4.8 Through 120-4.29
The Legislative Retirement System was created by
the 1983 Session of the General Assembly as a
retirement plan for members of the General Assembly.
The membership also includes: (1) members who were
vested or had maintained contributions in the
Legislative Retirement Fund; and (2) those retirees
receiving a benefit from the Legislative Fund who elect
to transfer to the Legislative Retirement System.
As of December 31, 2001, the System had 169
active members, 88 inactive members, and 204 retired
members. Assets on that date totaled $26,444.654.
Operations of the System during calendar year 2001
resulted in total receipts of $511,952 and
disbursements of $1,149,348.
Based on the latest actuarial report, the employer
contribution rate was set by the General Assembly at
.00% of covered payroll, effective July 1, 2002. On this
basis, the total of employee and employer rates of
contribution is adequate to fund all future benefits
presently authorized.
Disability Income Plan
N.C.G.S. 135-100 Through 135-113
The Disability Income Plan of North Carolina was
created in 1987 by the North Carolina General
Assembly with an effective date of January 1, 1988.
This plan replaced the former provisions for disability
retirement under the Teachers’ and State Employees’
Retirement System and replaced the benefits provided
under the former Disability Salary Continuation Plan.
The purpose of this plan is to provide equitable
replacement income for eligible teachers and State
employees who become temporarily or permanently
disabled for the performance of their duty prior to
retirement. Based on the latest actuarial report, the
General Assembly set the employer contribution rate to
fund this benefit at .52% of the covered payroll of
members of the Teachers’ and State Employees’
Retirement System and the Optional Retirement
Program, effective July 1, 2002.
The following are certain statistics relating to the
number of disabled members, number of new claims,
employer contributions, investment earnings, and
amount of benefit payments during the calendar years
ended 2000 and 2001.
2000 2001
Number of Disabled Members 4,285 4,490
New Claims During the Year 865 838
Employer Contributions $52,268,811 $55,638,722
Investment Income $25,988,037 $18,465,752
Amount of Benefit Payments $36,793,409 $40,311,759
Public Employees’ Social Security Agency
(Social Security Agency)
N.C.G.S. 135-19 Through 135-26
The Social Security Agency administers the State’s
responsibility under the Social Security Agreement
between the State of North Carolina and the United
States Secretary of Health and Human Services. This
Agreement was entered into on July 16, 1951 and
executed pursuant to authority in Section 218 of the
Federal Social Security Act and Article 2, Chapter 135,
of the General Statutes of North Carolina.
The provisions of the Agreement require the Social
Security Agency to provide the mechanics of coverage
for the State and its qualified political subdivisions, and
to act as liaison between the State and the Social
Security Administration.
18
National Guard Pension Plan (Guard Plan)
N.C.G.S. 127A-40
The Guard Plan was transferred to the Department
of State Treasurer for payment of monthly benefits by
the 1979 Session of the General Assembly, effective
July 1, 1979. This Division pays allowances based on
the certification of eligibility of former national
guardsmen by the Secretary of the Department of
Crime Control and Public Safety. The payments of
benefits are funded by State General Fund
appropriations by the General Assembly. As of
December 31, 2001, there were 2,060 beneficiaries in
receipt of monthly allowances from the Guard Plan at a
cost that calendar year of $1,976,450.
The 1983 Session of the General Assembly
enacted legislation, effective July 1, 1983, creating a
trust fund for financing National Guard Plan payments
and requiring that the Plan be maintained on a
generally accepted actuarial basis. Based on an
actuarial study after passage of this legislation, the
June 1984 Session appropriated $1,717,977 to begin
actuarial reserve funding. The funding appropriated for
2001-02 was $899,758.
Supplemental Retirement Income
Plan of North Carolina [401(k) Plan]
N.C.G.S. 135-90 Through 135-95; 143-166.30; And 143-166.50
The 1983 Session (Regular Session, 1984)
enacted enabling-type legislation creating the State’s
Internal Revenue Code Section 401(k) Plan effective
as of January 1, 1985. The Plan is a voluntary tax-deferred
savings/investment program designed to
supplement members’ replacement income in
retirement. The Plan is governed jointly by the State
Treasurer and a Board of Trustees composed of
members of the Boards of Trustees of the Teachers’
and State Employees’ and Local Governmental
Employees’ Retirement Systems.
Branch Banking and Trust Company (BB&T), the
Plan’s third-party administrator, is responsible under
the Plan document adopted by the Board, and the
terms of the contract with the Board, for all aspects of
operating the Plan. This responsibility includes
communications, record keeping, and investment
products.
The Plan’s number of participating members rose
from 169,549 as of July 1, 2001, to 178,058 members
as of June 30, 2002, for an increase of over 5.0%.
Contributions by employers during this fiscal year
totaled $102,458,171 while salary deferred
contributions by members were over $175,675,467.
The total assets at book value of the Plan increased by
8.7% to $2,456,468,057.
Under the current contract, members may select
from a bank investment contract, a money market
account, and eight mutual funds. As of June 30, 2002,
16.57% of the assets were invested in the bank
investment contract, 66.41% were invested in the
mutual funds, and 11.41% were invested in the money
market account. In addition, 5.14% of the assets were
loans receivable and 0.47% of the assets were cash on
deposit.
A portion of court cost receipts are deposited into
the account of each State and local government law
enforcement officer. For the year ended June 30, 2002,
court cost receipts of $1,848,217 were transferred and
credited to the State and local law enforcement
officers’ accounts.
The Supplemental Retirement Income Plan of
North Carolina continues to be the largest State
governmental 401(k) Plan in the United States.
Registers of Deeds’ Supplemental Pension Fund
N.C.G.S. 161-50 Through 161-50.5
The Registers of Deeds’ Supplemental Pension
Fund was created by the 1987 Session of the General
Assembly for the purpose of providing a supplement to
Local Governmental Employees’ Retirement System
benefits for Registers of Deeds. The stated purpose of
the Act was to attract the most highly qualified talent
available within the State to that county office.
In October of 1987 each county board of
commissioners began remitting monthly, to the
Department of State Treasurer, an amount equal to
4.5% of the receipts collected pursuant to Article 1 of
Chapter 161 of the General Statutes for deposit to the
credit of the Register of Deeds’ Supplemental Pension
Fund. As of December 31, 2001, the Fund had total
assets in the amount of $13,164,403.
Benefits from the Fund became payable beginning
July 1, 1988. For the year ending December 31, 2001,
the Fund paid total benefits in the amount of $728,520
to 68 retired Registers of Deeds.
19
State and
Local Government
Finance Division
The State and Local Government Finance Division
is organized to provide the State Treasurer, the Local
Government Commission, the North Carolina Solid
Waste Management Capital Projects Financing
Agency, and the North Carolina Capital Facilities
Finance Agency with staff assistance in fulfilling their
respective statutory functions. The Division is
organized along functional lines into two major groups
of services: Debt Management and Fiscal
Management.
The Local Government Commission (LGC) renders
assistance to local governments and public authorities
in North Carolina. The LGC, staffed by the Department
of State Treasurer, approves the issuance of debt for
all units of local government and assists these units
with fiscal management. The Commission is composed
of nine members: the State Treasurer, the Secretary of
State, the State Auditor, the Secretary of Revenue, and
five others by appointment (three by the Governor, one
by the General Assembly upon the recommendation of
the President Pro Tempore and one by the General
Assembly upon the recommendation of the Speaker of
the House.) The State Treasurer serves as Chairman
and selects the Secretary of the Commission, who
heads the administrative staff serving the Commission.
The North Carolina Solid Waste Management
Capital Projects Financing Agency provides a loan
fund for financing the capital expenses incurred in
implementing local and regional solid waste
management programs. The Agency Board of
Directors consists of five members: the State Treasurer
and four others by appointment (two by the Governor
and two by the General Assembly upon the
recommendation of one each by the Speaker of the
House of Representatives and the President Pro
Tempore of the Senate). Administrative staff for the
Agency is provided by the Department of State
Treasurer.
Nonprofit and for-profit corporations provi ding
certain services may receive financing assistance
through bonds issued by the North Carolina Capital
Facilities Finance Agency. The Agency Board of
Directors is composed of seven members: the State
Treasurer, the State Auditor, and five others by
appointment (three by the Governor, one by the
President Pro Tempore of the Senate and one by the
Speaker of the House of Representatives). The
administrative staff for the Agency is provided by the
Department of State Treasurer.
The Division handles the sale and delivery of all
State and local debt and monitors the repayment of
State and local government debt.
Operational Highlights
• Competitive tax-exempt general obligation
bonds for the State were sold totaling $605 million.
On March 12, 2002, $204.4 million tax-exempt
public school building, clean water and higher
education bonds (6.32 years average life) were sold
competitively at a true interest cost 114 basis
points below the national Bond Buyer’s Index (the
“BBI”), resulting in interest savings of
approximately $14.7 million over the life of the
bonds. On April 3, 2002, $10.6 million tax-exempt
clean water bonds (2.89 years average life) were
sold at a true interest cost of 3.4911%. In addition,
the State sold $35 million taxable natural gas
bonds on March 12, 2002 at a true interest cost of
3.6317%.
• Variable interest rate bonds for the State were
sold on May 1, 2002 totaling $355 million. These
bonds were for public schools, higher education
and clean water. The variable rate bonds will allow
the State to take advantage of low short-term rates
on longer-term debt, and an estimated $45 million
savings over the lifetime of the variable rate bonds
is expected.
• The staff continued its efforts to distribute and
receive information electronically. Memorandums,
manuals and comparative financial data for all
counties and municipalities are available through
the Department’s homepage. Annual financial
information reports were received electronically
from 98 counties and 335 municipalities.
• The State continued to retain its excellent bond
rating of “Triple-A,” one of only nine states in the
nation with this coveted rating from all three
national rating agencies.
Debt
Management
Fiscal
Management
Local
Government
Commission
Robert M. High
Director
Solid Waste
Management Capital
Projects Financing
Agency
North Carolina
Capital
Facilities Finance
Agency
20
• Of the $1.0 billion in general obligation bonds
sold for local governments $.9 billion were sold
competitively with rates averaging 95 basis points
under the national Bond Buyer’s Index, which
resulted in sa vings in excess of $53.5 million over
the life of these bonds.
• Bond issues totaling $293 million were
approved and sold for the North Carolina Housing
Finance Agency, thus increasing the supply of
affordable housing for North Carolinians of
moderate and low income.
• Industrial revenue and pollution control bonds
in excess of $81 million were issued to finance or
refinance 10 projects which created 189 jobs and
saved 7 jobs.
• Members of the staff worked with the Institute
of Government to present the First Annual State
Treasurer’s Conference on Local Government
Accounting, Auditing and Financial management
for local government auditors and officials.
• Memorandums were issued to local
governments and their auditors concerning
numerous GASB Statement No. 34 topics,
legislative changes, audit issues, and Single Audit
and financial reporting issues. Memorandums were
also issued comparing tax collection efforts,
operation of water and sewer systems, operation of
electric systems, operation of public hospitals and
school capital outlay spending among units.
• Installment purchase contracts were sold for
over $493 million, typically for smaller projects.
• The staff has developed the County and
Municipal Information Website:
(http://www.treasurer.state.nc.us/lgc/units/unitlistjs.htm)
. The site displays detailed financial, population
and property tax data for the latest six year period
for all North Carolina counties and municipalities.
• Twenty-three revenue bonds for over $611
million were sold for local governments, mainly for
hospitals, airports and water and sewer projects.
• Over $497 million in hospital revenue bonds
was sold for the North Carolina Medical Care
Commission through thirteen bond issues.
• Over $422 million was provided for capital
projects to private schools, colleges and other
nonprofit corporations through 19 bond issues by
the North Carolina Capital Facilities Finance
Agency.
• The staff reviewed the financial statements of
1,143 local governments and public authorities.
These audit reviews included 613 single audits and
200 yellow book audits required by federal and
State laws.
• The staff worked with local governments and
public authorities whose debt is subject to
secondary market disclosure requirements
established by the Securities Exchange
Commission to be certain that all required
disclosures were made by the date required.
Failure to meet those requirements would
negatively impact a unit’s ability to borrow in the
future. Two hundred and twelve units were
required to make this disclosure for the fiscal year
ended June 30, 2001.
• The thirteenth annual State Treasurer’s Awards
were presented to local governments and public
authorities that demonstrated significant
improvements in accounting or financial
management programs, systems, methods and
procedures. A State Treasurer’s Awards Program
was also established for nonprofit organizations
that provide valuable services to the citizens of the
State.
• In October the Local Government Commission
voted to assume control of the fiscal affairs of the
Town of East Spencer. The staff worked with local
officials to restore the fi scal integrity of the Town,
establish a sound system of fiscal management
and provide services essential to the health and
safety of the citizens of the Town.
• The staff worked with 19 State agencies to
compile and distribute more than 350 compliance
supplements for program grants administered by
the agencies. These supplements will be used by
auditors of local governmental units.
• The Staff closely monitored the impact of the
State budget upon the fiscal condition of cities and
counties.
• The LGC 203 Reports, Report of Investments
and Deposits, was updated to permit local
governments to submit the report electronically.
The State of Tax-Exempt Financing
As one of the few remaining tax shelters,
governmental bonds continue to be an attractive
means of financing for local governments. Without tax -
exempt financing, the interest rates charged on
borrowed funds could increase from 1 to 3 percentage
points resulting in a 20 to 30 percent increase in the
cost of financing. Utility customers and taxpayers
would ultimately pay this increase.
Market conditions were favorable for tax-exempt
debt during the fiscal year. The Bond Buyer’s Index of
20 General Obligation Bonds ranged from a low of
4.91% on November 8, 2001 to a high of 5.34% on
March 11, 2002.
21
The Basic Functions
Debt Management
The Division issues and monitors all State debt
secured by a pledge of the taxing power of the State.
After voter approval of a bond issue and with the
assistance of other State agencies, the Division
determines the cash needs, plans for the repayment of
debt (maturity schedules), and schedules bond sales at
the most appropriate time. An official statement
describing the bond issue and other required
disclosures about the State is prepared with the advice
and cooperation of bond counsel. Finally, the Division
handles the actual sale and delivery of the bonds,
maintains the State bond records and register of
bonds, and monitors the debt service payments. At
June 30, 2002, the State had general obligation bonds
outstanding of $3,458 billion. (See Tables 8 and 9.)
The Division also is responsible for the
authorization and sale of revenue bonds for the North
Carolina Medical Care Commission, the Municipal
Power Agencies, the North Carolina Capital Facilities
Finance Agency, the North Carolina Housing Finance
Agency and the North Carolina Solid Waste
Management Capital Projects Financing Agency. Only
the specific revenues pledged in payment thereof
secure these bonds. The staff works with these
agencies’ personnel in determining the feasibility and
scheduling of the bond offering, in structuring the issue
and the underlying security documents, and in
preparing the data that must be presented to the Local
Government Commission for its approval.
The Division assists the State Treasurer in
representing the State in all presentations to Moody’s
Investors Service, Inc.; Standard and Poor’s
Corporation; and Fitch, Inc., the three national bond
rating agencies used by the State and local
governmental units in North Carolina. At June 30,
2002, the State had a “Triple-A” rating, the highest
rating attainable, from all three national rating
agencies. These favorable ratings has enabled the
State to sell its bonds at an interest rate considerably
below the Bond Buyer’s Index, thereby providing
tremendous savings to North Carolina’s taxpayers.
Another important function of the Division is the
approval, sale, and delivery of all North Carolina local
government bonds and notes. The Division staff
counsels and assists local governmental units in
determining the necessity of the project, the size of the
issue, and the most expedient form of financing. A
review is made of the debt management policies of the
unit, the effect of the financing on the tax rate, and the
unit’s compliance with The Local Government Budget
and Fiscal Control Act. Sale dates are scheduled
depending on the need for the money, the anticipated
interest rates, and the times when the bonds can be
sold with a minimum of competition. The staff strives to
resolve all problems and determine that all statutory
requirements are met before applications are
presented to the Local Government Commission for
approval.
After approval is granted, the governmental unit
and its bond counsel assist the staff in gathering and
assembling information for an official statement, which
is mailed to a large group of potential bidders
nationwide. The general obligation bonds are awarded
through the competitive bid process on the basis of
lowest total net interest cost to the governmental unit.
After the sale, the staff delivers and validates the
definitive bonds and ensures that the moneys are
promptly transferred from the buying brokers to the
governmental unit.
In addition to bond sales, the staff assists the units
in selling certain short-term debt obligations. These
may be bond anticipation notes to provide interim
funding of projects until the definitive bonds are sold, or
they may be other notes secured by specific pledges of
taxes, grants, or future revenues. Authorization for
short-term debt obligations also is based upon Local
Government Commission approval.
Debt records are maintained for all units on
principal and interest payments coming due in the
current and future years. All debt service payments are
monitored through a system of monthly reports.
At June 30, 2002, authorized and unissued general
obligation bonds for local governments amounted to
$2.7 billion; and general obligation debt outstanding
amounted to over $7.5 billion. (See Table 8.) During
the 2001-2002 fiscal year, bonds and notes were sold
in the amount of $1,774,459,850. (See Chart 31.) Of
the $1,040,178,160 in general obligation bonds
marketed for local units, over $.9 billion were sold
competitively at tax-exempt rates averaging
approximately 95 basis points below the national
average (according to the Bond Buyer’s Index). Over
the life of these bonds, the issuers are expected to
save in excess of $53.5 million in interest costs. Such
savings are a result, in part, of the Division’s
successful efforts in maintaining and upgrading the
bond ratings of the State and local units and in
monitoring the fiscal soundness of the individual local
units.
The Division’s staff also assists in the sale of
revenue bonds, which must have the Commission’s
approval in order to be issued by municipalities, joint
municipal electric power agencies, and county
industrial facilities and pollution control financing
authorities. These bonds are secured only by specific
revenue pledged in payment of the bonds. (See Charts
31 and 32.)
22
Another responsibility of the Division’s staff is
assisting units that desire to enter into agreements to
finance the lease or installment purchase of capital
assets. Local Government Commission approval is
required when the contract or agreement extends for
five or more years; and obligates the unit to pay sums
of money to another, without regard to whether the
payee is a party to the contract; and obligates the unit
to the extent of $500,000 or a sum equal to one tenth
of one percent (.001) of the appraised value of property
subject to taxation by the unit, whichever is less. Local
Government Commission approval also is required
when the contract or agreement involves the
construction or repair of fixtures or improvements on
real property and it is not exempted in G.S. 159-148(b).
Before approving such agreements, the Local
Government Commission must find that the proposed
project is necessary and expedient, the proposed
undertaking cannot be economically financed by a
bond issue, and the contract will not require an
excessive increase in taxes. During the fiscal year
ended June 30, 2002, the Local Government
Commission approved contracts or other agreements
totaling $493.9 million. (See Tables 6 and 7.)
The Division also serves as staff to the North
Carolina Capital Facilities Finance Agency, an agency
established by the General Assembly in 1986.
Originally named the North Carolina Educational
Facilities Finance Agency, the act creating the Agency
has been amended several times and its ability to
finance capital projects significantly expanded.
Following initial contact from an applicant, the staff
generally begins the process of determining project
feasibility and desirability with a preliminary
conference. Upon receipt of an application, financial
capability and responsibility is reviewed through ratio
and trend analysis. The staff presents the project and
its recommendations to the seven-member North
Carolina Capital Facilities Finance Agency and
subsequently to the Local Government Commission for
approval. (All debt issued by the Agency also must be
approved by the Local Government Commission.)
Fiscal Management
Another function of the Division involves monitoring
certain fiscal and accounting standards prescribed for
local governmental units by The Local Government
Budget and Fiscal Control Act. As a part of its role in
assisting local units and monitoring their fiscal
programs, the Division provides guidance in following
generally accepted accounting principles. The Local
Government Budget and Fiscal Control Act requires
each unit of local government to have its accounts
audited annually by a Certified Public Accountant or by
an accountant certified by the Commission as qualified
to audit local government accounts. That audit must be
performed in accordance with Generally Accepted
Auditing Standards promulgated by the AICPA. If a
governmental unit is required to have an expanded
audit performed in accordance with Government
Auditing Standards, the auditor is required to provide
the unit and the Local Government Commission with a
copy of the audit firm’s most recent peer review report
prior to contracting for the audit. Each local
government is required to file a copy of its annual audit
report with the Division and submit all invoices to the
Division for approval. The Division monitors the annual
audit reports for compliance with generally accepted
accounting principles and single audit disclosure
requirements. Also, a detailed analysis is made of the
financial condition of each unit. In analyzing a unit’s
financial condition, staff members look not only at
financial ratios and budgetary indicators, but also at
possible trends that may be early warning signs of
potential financial difficulties. Problems or concerns are
brought to the attention of the governmental units and,
if problems persist or become more serious, unit visits
are made by staff members in order to provide hands -
on technical assistance.
In providing assistance to local governments, units
are counseled in accounting systems and internal
controls, cash and investment management, budget
preparation, risk management, capital planning, and
changes in laws and regulations. Staff members also
perform research and provide technical assistance to
local governments with specific questions in these
areas. On-site assistance is furnished to local
governments with regard to financial and accounting
systems and management services. Educational
programs, in the form of seminars and classes, also
are provided in order to accomplish these tasks. Staff
members make presentations throughout the year at
various workshops sponsored by the Institute of
Government; the North Carolina Government Finance
Officers Association; the North Carolina Association of
County Finance Officers; the Association of
Government Accountants; the N.C. Local Government
Investment Association; and numerous other county,
municipal, and school organizations. The Staff also
worked with the Institute of Government to present the
First Annual State Treasurer’s Conference on Local
Government Accounting, Auditing and Financial
Management to provide training to local government
auditors and officials.
The Division has expanded its assistance role by
maintaining computerized databases of historical
information from local government audit reports, city
and county Annual Financial Information Reports, and
Reports of Deposits and Investments. The information
collected is used in a variety of ways to automate
operations and enhance the assistance provided to
local governments. The files also are utilized in special
projects that benefit the operations of the State. Upon
request, data is provided to such organizations as the
23
U.S. Bureau of the Census, the N.C. Department of
Revenue, the General Assembly, the N.C. League of
Municipalities, the Institute of Government, and the
N.C. Association of County Commissioners to assist
these groups in their activities.
Because of recent changes in the field of
governmental accounting and the enactment of the
Federal Single Audit Act and the State Single Audit
Act, continuing assistance is provided to the
independent auditors of local governments,
particularly in the area of professional education.
The Staff reviewed and compiled over 350
compliance supplements from State agencies to be
used by local government auditors. A member of the
staff serves on the Governmental Accounting and
Auditing Committee of the North Carolina
Association of Certified Public Accountants. Staff
members provide additional assistance to
independent auditors by researching their questions
concerning governmental accounting, auditing, and
budgeting, as well as North Carolina laws. In
addition, all exposure drafts of the Governmental
Accounting Standards Board (GASB) are analyzed,
and any comments and recommendations that staff
may have on these drafts are submitted to the
GASB.
Significant Accomplishments
Debt Management
North Carolina General Obligation Bonds —In
2001-02 the State sold general obligation bonds
totaling $605 million. On March 12, 2002, $204.4
million tax-exempt public school building, clean water
and higher education bonds (6.32 years average life)
were sold at a true interest cost 114 basis points below
the national Bond Buyer’s Index (the “BBI”), resulting in
interest savings of approximately $14.7 million over the
life of the bonds. The State also sold $35 million
taxable natural gas bonds on March 12, 2002 at a true
interest cost of 3.6317%. On April 3, 2002, $10.6
million tax-exempt clean water bonds (2.89 years
average life) were sold at a true interest cost of
3.4911%. Variable interest rate bonds for the State
were sold on May 1, 2002 totaling $355 million. These
variable rate bonds consisted of public school building,
clean water bonds and higher education bonds. The
variable rate bonds will allow the State to take
advantage of short-term rates on longer-term debt, and
approximately a $45 million savings over the lifetime of
the variable rate bonds is expected. The public school
building bonds were approved by the voters of the
State in November 1996, the clean water and natural
gas bonds each in November 1998 and the higher
education bonds in November 2000.
Installment and Lease Purchase Agreements — The
installment and lease purchase method of financing
continues to be used by local governments, typically
for smaller projects for which a bond referendum is not
cost effective and for essential projects for which units
of government face mandates. The number of
installment and lease purchase agreements approved
decreased from 102 to 96 and the dollar volume
approved decreased from $706.9 million in FY 2000-
2001 to $493.9 million in FY 2001-02. (See Tables 6
and 7.) The actual amount of installment and lease
purchase agreements closed during the year totaled
$461.9 million. (See Chart 32.)
Revenue Bonds --- Interest in revenue bond
financing continued. These bonds are secured by the
revenues of the projects being financed rather than
property taxes and do not require a vote of the people.
During 2001-2002 the Local Government Commission
sold over $611 million in revenue bonds in 23 separate
issues for local governments. Economic growth, viable
enterprise activities and the narrowing of rate
differential between general obligation bonds and
revenue bonds have been factors in the increased
interest in this type of financing. However, revenue
bonds are more costly than general obligation bonds
because of both higher interest rates and increased
issuance costs. Most of the revenue bonds in 2001-
2002 continued to be for water and sewer projects.
North Carolina Medical Care Commission
Bonds — During 2001-2002 the Local Government
Commission approved and sold thirteen separate
issues of bonds and notes for the North Carolina
Medical Care Commission totaling over $497 million.
This activity continues to reflect the rapidly changing
environment of health-care as facilities continue to
position themselves for an uncertain future with
Medicare/Medicaid adjustments, further changes in the
managed care industry and an aging population
demanding more services at lower costs. The largest
issue was for Mission St. Joseph’s Health System for
$110 million to provide for construction and other
renovations. In attempting to meet the needs of our
aging population, eight independent living/assisted
living issues providing for the acquisition or financing of
eight separate facilities were successfully completed
during 2001-2002. Diverse issue needs were met
through fixed rate revenue bonds and variable rate
demand revenue bonds. In attempting to better
address the continuum of health-care, careful planning
and evaluation will continue to be given to additional
project risks and innovative techniques used in their
financing to insure both project success and
bondholder confidence.
North Carolina Housing Finance Agency —
The North Carolina Housing Finance Agency (NCHFA)
is a self-supporting State agency created by the
General Assembly in 1973 to increase the supply of
24
affordable housing for North Carolinians of moderate
and low income. The agency sells tax-exempt revenue
bonds to finance mortgages for first-time homebuyers
at interest rates below conventional market rates. In a
companion program, it converts part of its bond
authority to provide tax credits (Mortgage Credit
Certificates) which first-time homebuyers use in
conjunction with conventional loans to lower the cost of
home ownership. The agency also issues bonds to
finance privately owned rental housing for low-income
households. In addition, it finances affordable housing
through the federal Housing Credit Program, HOME
Investment Partnership Program, and the State’s
Housing Trust Fund. In its history, the agency has
issued more than $5.9 billion in tax-exempt bonds and
tax credits to produce and provide housing for over
153,500 households. In FY 2001-2002, financing and
tax credits were provided to support total development
of $642 million. This includes $293 million through
bond sales and 2 mortgage credit certificate elections
totaling $151 million. The Agency also issued $9.7
million in multifamily revenue bonds for housing for the
elderly.
Industrial Revenue Bonds — The use of
industrial revenue bonds has contributed to North
Carolina’s impressive record of industrial development.
These bonds provide tax-exempt financing and are
used to attract manufacturing industries to the State.
Since 1976, there have been 1,097 issues totaling over
$6.1 billion. These 1,097 issues have created over
97,000 jobs and saved over 39,000 jobs. In the fiscal
year ended June 30, 2002, 10 issues of Industrial
Revenue and Pollution Control Facilities Bonds were
issued for a total of $81,705,000. This resulted in the
creation of 189 jobs and 7 jobs saved. Additionally,
$40,885,000 of special purpose bonds were issued by
local industrial and pollution control authorities on
behalf of non-profit corporations.
Volume Cap Allocation — Legislation was
approved by the 1987 Session of the General
Assembly to maintain a State pool of the federal
volume cap from which projects for industry, low and
moderate income housing, low-interest rate student
loans, etc., could be approved, thus giving maximum
flexibility in use of the volume cap. The volume cap
allocation affords tax-exempt financing for projects of
this type. For the calendar year 2002, the State was
allotted $614 million to use for private activity bonds. In
2003, the volume cap is expected to increase slightly.
The Tax and Trade Relief Act increased the per capita
allotment from $50 to $75 with the increase phased-in
from 2003 to 2007.
“Triple-A” General Obligation Bond Ratings —
A “Triple-A” general obligation bond rating is the
highest attainable and reflects strengths in debt
position, economic base, administrative variables, and
financial performance. Standard & Poor’s rating
agency has assigned “Triple-A” general obligation
long-term debt ratings to states, counties, and cities
throughout the entire United States; approximately one
out of every four of those are North Carolina units. The
following North Carolina units have “Triple-A” bond
ratings issued by Standard & Poor’s: the State of North
Carolina; the counties of Durham, Forsyth, Guilford,
Mecklenburg, and Wake; and the cities of Cary,
Charlotte, Durham, Greensboro, Raleigh, and Winston-
Salem. In addition, the Special Airport District of
Durham and Wake counties also enjoy a “Triple-A”
rating. To quote from Standard & Poor’s Credit
Surveys: “The ‘AAA’ General Obligation rating for
cities, counties, and states indicates that very high
standards have been achieved and maintained.”
North Carolina Capital Facilities Finance
Agency — The North Carolina Capital Facilities
Finance Agency (NCCFFA) was created in 1986, was
originally named the North Carolina Educational
Facilities Finance Agency, and provided the benefits of
tax-exempt financing to nonprofit private institutions of
higher education in the State of North Carolina. This
act was amended in 1998 session of the General
Assembly to broaden its powers to permit financing
facilities of kindergarten, elementary and secondary
nonprofit private schools again in the 1999-2000
session and change its name to its present name and
to allow it to finance additional types of capital projects.
The additional types of capital projects able to be
financed include student housing facilities when owned
or operated by an institution other than an institution of
higher education or elementary or secondary
education. Also included within the authority of the
NCCFFA are special purpose projects which are
defined to include water systems or facilities, including
all plants, works, instrumentalities, and properties used
or useful in obtaining, conserving, treating, and
distributing water for domestic or industrial use,
irrigation, sanitation, fire protection, or any other public
or private use; sewage disposal systems or facilities,
including all plants, works, instrumentalities, and
properties used or useful in the collection, treatment,
purification, or disposal of sewage, other than facilities
constituting a water pollution control facility; public
transportation systems, facilities, or equipment,
including bus, truck, ferry, and railroad terminals,
depots, trackages, vehicles, and ferries, and mass
transit systems; public parking lots, areas, garages,
and other public vehicular parking structures and
facilities; public auditoriums, gymnasiums, stadiums,
and convention centers; recreational facilities; land,
equipment, and facilities for the disposal, treatment, or
recycling of solid or other waste that are described in
G.S. 159I-8; facilities for the provision of rehabilitation
services, education, training, and employment
opportunities for persons with disabilities and the
disadvantaged not to include a retail facility, however,
unless the proposed operator of the facility certifies
that at least seventy-five percent of its employees will
be disadvantaged or disabled persons and at least
seventy-five percent of its inventory will be composed
of used, donated items and items manufactured by
disadvantaged or disabled persons. While the 1999-
2000 amendments, effective July 1, 2000, made
significant changes in the scope of activities of the
25
agency, they did not affect the bonds outstanding in
any material respect.
The NCCFFA has provided $1,611,289,979 in
tax-exempt capital financing through 112 issues. This
amount includes $23,600,000 in tax-exempt financing
originally issued by the North Carolina Industrial
Facilities and Pollution Control Facilities Financing
Authority in three issues on behalf of 12 corporations.
There have been no defaults. At June 30, 2002, there
were $1,257,164,275 in outstanding obligations. Each
issue is payable solely from revenues derived from
each corporate entity financed, is separately secured,
and is separate and independent from all other series
of bonds as to source of payment and security. During
the fiscal year ended June 30, 2002, the NCCFFA
issued $422,728,000 for 18 institutions. The Annual
Report of the NCEFFA is available from the Office of
the State Treasurer.
North Carolina Clean Water Revolving Loan
and Grant Funds — The North Carolina Clean Water
Revolving Loan and Grant Fund was established by
the 1987 General Assembly to provide low-interest rate
loans to local governments constructing or improving
water and sewer operations. Demand for the funds has
far exceeded the amount appropriated. The intent is for
this fund to become self-perpetuating and for a
permanent water and sewer loan fund to be made
available.
The staff is responsible for reviewing the
applicant’s fiscal/debt management policies;
determining the feasibility of the project; and
coordinating the loan offers with the Department of
Environment and Natural Resources. Maturity
schedules are prepared for each loan, and the staff
oversees the signing of the promissory notes.
In 2001-2002, a total of sixteen units were selected
to receive revolving loans ranging from $54,466 to
$13,566,459. Additionally, five State bond loans were
approved ranging from $36,850 to $2,875,000.
26
Chart 7
Total
School Utilities Refunding Other No. Amount
G.O. Bonds
Counties $ 439,850,000 $ 15,010,000 $ 138,840,000 $ 132,600,000 23 $ 726,300,000
Municipalities $ - $ 40,408,000 $ 74,258,000 $ 150,260,000 24 $ 264,926,000
Districts and Authorities $ - $ 41,954,300 $ 6,997,800 $ - 13 $ 48,952,100
Total G.O. Bonds $ 439,850,000 $ 97,372,300 $ 220,095,800 $ 282,860,000 60 $ 1,040,178,100
Revenue Bonds
Counties $ - $ - $ - $ 31,780,000 2 $ 31,780,000
Municipalities $ - $ - $ 84,250,000 $ 225,685,000 7 $ 309,935,000
Districts and Authorities $ - $ 21,865,000 $ 152,483,000 $ 95,810,000 14 $ 270,158,000
Total Revenue Bonds $ - $ 21,865,000 $ 236,733,000 $ 353,275,000 23 $ 611,873,000
Special Obligation Bonds
Solid Waste - - - - $ -
Total Special Obligation $ - $ - $ - $ - $ - $ -
Bonds
State Bond and Revolving
Loans
Counties $ - $ 7,478,415 $ - $ - 2 $ 7,478,415
Municipalities $ - $ 25,223,085 $ - $ - 12 $ 25,223,085
Districts $ - $ 6,713,746 $ - $ - 2 $ 6,713,746
Total State Bond and $ -
Revolving Loans $ - $ 39,415,246 $ - $ - 16 $ 39,415,246
Notes
G.O. Bond Anticipation
Notes $ - $ 59,684,000 $ - $ 26,725,000 28 $ 86,409,000
Revenue Notes - $ - - $ - 0 $ -
Total $ - $ 59,684,000 $ - $ 26,725,000 28 $ 86,409,000
Total Bonds and Notes $ 439,850,000 $ 218,336,546 $ 456,828,800 $ 662,860,000 127 $ 1,777,875,346
27
Chart 8
Debt Management Activities – State and Local (In Millions)
FY 2001-02 FY 2000-01 FY 1999-00
No. Amt. No. Amt. No. Amt.
Bonds Sold for State
G.O. Bonds (General Fund) 4 $ 605.0 2 $ 680.0 3 $ 200.0
G.O. Bonds (Highway Fund) 0 - 0 - 0 -
Total 4 $ 605.0 2 $ 680.0 3 $ 200.0
Bonds and Notes Sold for Local Government Units:
G.O. Bonds 60 1,040.2 42 1,290.5 37 587.8
Revenue Bonds 23 611.8 26 786.8 19 487.4
State Bond and Revolving Loans 16 39.4 13 17.6 17 30.0
Special Obligation Bonds - Solid Waste 0 - 0 - 4 16.4
G.O. Notes 28 86.4 33 82.1 21 39.0
Revenue Notes 0 - 0 - 0 -
Total 127 $ 1,777.8 98 $ 2,177.0 173 $ 1,160.6
Installment/Lease Contracts Sold for Local Units: 70 $ 461.9 104 $ 627.2 110 $ 571.6
Revenue Bonds Sold for:
Medical Care Commission 13 497.1 12 435.1 12 281.3
Housing Finance Agency 3 302.8 4 152.2 4 265.0
Power Agencies 0 - 3 - 3 420.9
Industrial Facilities and Pollution Control
Financing Authorities 15 122.9 26 578.9 26 247.5
Capital Facilities Finance Agency 19 455.9 16 196.1 16 224.6
Total 50 $ 1,378.7 61 $ 1,362.3 65 $ 1,439.3
Grand Total 251 $ 4,223.4 265 $ 4,846.5 351 $ 3,371.5
28
Fiscal Management
The North Carolina Capital Management Trust —
The balance of the Cash Port folio in the North Carolina
Capital Management Trust (NCCMT) decreased
approximately 3.4% from June 30, 2001 to June 30,
2002. This decrease occurred because units had less
funds available for investment. At fiscal year-end, the
Cash Portfolio totaled $3.9 billion, while the Term
Portfolio had a year-end balance of $71.5 million. The
North Carolina Capital Management Trust (NCCMT) is
a SEC-registered mutual fund, organized in April 1982
as an investment available only to North Carolina units
of government and public authorities. The Trust is
under the direction of a Board of Trustees, the majority
of which are elected by the participating shareholders
(units of government and public authorities) based
upon their ownership shares of the Trust. There were
562 participants in the Cash Portfolio at June 30, 2002,
compared to 556 at June 30, 2001. The number of
participants in the Term Portfolio was 43 at June 30,
2002. The NCCMT, a AAAm rated fund by Standard
and Poor's, is one of the largest local government
investment pools in the nation.
Review of Semi-annual Reports of Deposits
and Investments — The semi-annual Reports of
Deposits and Investments for the six months ended
June 30, 2001, and December 31, 2001, submitted by
local governments and public authorities, were
examined by the staff of the Division. The reports were
reviewed to determine strengths and weaknesses in
the units’ investment portfolios and to identify instances
of noncompliance with the North Carolina General
Statutes. Weaknesses were communicated in writing
to the units along with suggestions for improvement.
Financial Section of Bond Offering Statements —
The staff prepared or assisted in the preparation of the
financial section of 37 bond offering statements during
the fiscal year. The purpose of the financial section of a
bond offering statement is to provide users with several
years’ financial information about a unit of local
government. In order to be most meaningful, the
presentation of this multi-year information must be
consistent in its application of generally accepted
accounting principles (GAAP), a particular unit’s
accounting policies, and the requirements of the
General Statutes.
The financial section of a local government’s bond
offering statement includes: 1) a copy of the unit’s most
recently audited and issued general purpose financial
statements, including the notes; 2) compiled financial
statements of the governmental and enterprise fund
types of the unit for the three most recent fiscal years,
also including notes; and 3) compiled budget
statements for all annually budgeted governmental and
enterprise fund types that summarize the budgets
adopted subsequent to the most recently audited fiscal
year.
The preparation of the financial section of bond
offering statements requires a careful analysis and can
be a very complex process. First, the staff reviews the
most recent year’s general purpose financial
statements for presentation in accordance with GAAP
and compliance with North Carolina statutes, and
sometimes requests that changes be made in order for
the statements to be of the highest possible quality.
Next, the staff prepares compiled financial statements
of governmental and enterprise fund types for the three
most recent fiscal years. Adjustments must often be
made for changes in presentation, changes in GAAP,
changes in the reporting entity, or corrections of errors.
Any material adjustments made are fully disclosed in
the notes to the compiled financial statements. Finally,
the staff reviews compiled budgets prepared by the
unit. With the pending implementation of Governmental
Accounting Standards Board Statement No. 34, this
section of the offering statement may undergo some
changes in the coming years to accommodate the
transition to the new reporting format dictated by this
Statement.
Analysis of Official Pronouncements —Each
year the staff analyzes proposed changes or additions
to accounting standards that would eventually affect
State and local government financial reporting. The
majority of such changes are issued by the
Governmental Accounting Standards Board (GASB),
which has the authority to set GAAP for state and local
governments. The purpose of the staff’s responses is
to provide input into the development of governmental
accounting standards in light of the impact they would
have on North Carolina local governments and the
State as well. During the past year, the staff analyzed
proposed GASB standards dealing with reporting
requirements for affiliated organizations of local
governments.
State Treasurer’s Conference on Local
Government Accounting, Auditing and Financial
Management, and Other Continuing Education
Courses and Conferences. — Staff members worked
with the Institute of Government to present the first
annual conference. The conference was intended for
both local government auditors and officials. The
conference provided much needed training at a very
reasonable cost. It was conducted on two sites, and
drew nearly 200 participants at each site. Topics
covered included GASB Statement 34, Governmental
Auditing Standards, budgeting, purchasing, reporting
and audit issues.
Staff members spoke at approximately 25
continuing education courses and conferences
sponsored by organizations such as the Institute of
Government, the North Carolina Government Finance
Officers Association, the North Carolina Association of
County Finance Officers, the North Carolina Local
Government Investment Association, the Association
of Government Accountants, the North Carolina
Association of Council of Governments Finance
29
Directors, and the North Carolina Association of
Certified Public Accountants. Instruction was provided
by the staff at the beginning, intermediate, and
advanced levels for a wide range of local government
employees and board members as well as
independent auditors of local governments.
Monitoring Compliance with “Yellow Book”
Requirements — Paragraph 3.36 of the 1994 edition
of Government Auditing Standards issued by the
Comptroller General of the United States, commonly
known as the “Yellow Book,” contains a requirement
that auditors submit a copy of their most recent peer
review report to the party contracting for the audit. This
requirement was first effective for audits of financial
statements for the fiscal year ended June 30, 1995.
Auditors are required by the “Yellow Book” to have an
external review of their quality control procedures once
every three years. In order for audit contracts to be
approved, auditors are required to submit a copy of
their most recent report to the unit of government and
to our staff. External quality review reports have been
received from 286 offices of CPA firms.
Audit Manual for Governmental Auditors — The
audit manual issued to CPAs performing governmental
audits in North Carolina contains the following:
references to authoritative sources and literature, a
sample request for proposal for audit services,
checklists for statutory compliance with The Local
Government Budget and Fiscal Control Act and The
School Budget and Fiscal Control Act, a governmental
audit program, illustrative financial statements (for a
municipality, a county, a county board of education, a
housing authority, and a charter school), sample
independent auditor’s reports as well as single audit
reports, memoranda and publications, and compliance
supplements written by State agencies for various
federal and State grants. The State Single Audit
legislation mandates the preparation of compliance
supplements by State agencies, their review,
compilation, and issuance by the Department of State
Treasurer. Checklist for North Carolina requirements
related to purchasing, and contracting, and related
party transactions were added this year. Audit
procedures for unclaimed property were also added. In
addition, the manual is updated each year to reflect the
pronouncements of the GASB, Statements of Position
of the AICPA, circulars issued by the Federal Office of
Management and Budget, and other newly available
information. During the past year, the illustrative
Financial Statements were revised for the
implementation of GASB Statement No. 33 and
Statements No. 34, No. 37, No. 38 and GASB
Interpretation No. 6.
Audit Review Process — The staff of the Division
annually reviews the audit reports of approximately
1,143 units of local government. Each review consists
of the following: an analysis of proper presentation of
the financial statements in accordance with generally
accepted accounting principles; an analysis of proper
reporting in accordance with single audit requirements,
where applicable; and an evaluation of the financial
condition of the unit and its compliance with The Local
Government Budget and Fiscal Control Act, as well as
other State laws. Where problems are noted, local
governments and public authorities, as well as their
independent auditors, receive written communication
expressing the staff’s concerns, suggestions for
improvements, and an offer of further assistance, if
needed. A response detailing the unit’s plans to take
corrective action is requested. Approximately 200 of
these letters were sent to units of local government
during the 2001-2002 fiscal year.
As a part of the audit review process, the Division’s
staff reviewed approximately 613 single audits. An
extensive review is performed to ensure that audits
performed under the federal and State single audit acts
meet all the provisions of the law, as well as federal
and State requirements. This is necessary before
auditors’ invoices can be approved for payment, and
so State departments and agencies can rely on the
reports as a basis for compliance with applicable
federal and State regulations.
Local governments and public authorities receiving
a certain amount of federal and/or State financial
assistance must have a financial statement audit done
in accordance with Government Auditing Standards
(the “Yellow Book”). The Division’s staff reviewed
approximately 200 “Yellow Book” audits.
Memoranda and Other Publications — A
significant service provided by the staff of the Division
is the preparation and distribution of memoranda to
units of local government and their independent
auditors. These memoranda are of an informational,
technical, or statistical nature and are distributed to
finance officers, elected officials, and independent
auditors periodically throughout the year.
Topics of particular interest this year include
numerous memoranda related to the implementation of
GASB Statement No. 34, legislative changes, audit
issues, and Single Audit and financial reporting. Other
topics include the collateralization of public deposits,
and procedures for the approval of audit contracts and
invoices.
Other memoranda distributed by the staff
throughout the year contain statistical data of use to
the governmental units, their independent auditors, and
elected officials. Examples include a report and
analysis of cash and taxes of municipalities and
counties as reported at June 30, 2000; fund balance
available for appropriation in the General Fund of
municipalities and counties at June 30, 2000; county
spending for public school capital outlay; statistical
information on electric system operations; statistical
information on water and sewer system operations;
and statistical information on public hospital
operations. Governmental units may use these reports
to compare their operations to those of other units of
like-size, geographic location, or to statewide
averages. Independent auditors use this information to
assist in the audit process. The report on county
spending for schools is required by the N.C. General
30
Statutes to be prepared and provided to the General
Assembly.
Another publication updated annually is an
illustrative comprehensive annual financial report
(CAFR), prepared in cooperation with the Institute of
Government in Chapel Hill. The CAFR is utilized as
supporting material for educational programs
conducted by the Institute.
State Treasurer’s Governmental Accounting/Financial
Management Awards Program — The Department
sponsored the thirteenth annual “State Treasurer’s
Governmental Accounting/Financial Management
Awards Program.” This awards program is designed to
recognize units of government that have enhanced
their current operations through the implementation of
new and improved accounting and financial
management programs.
Entries addressing a variety of topics were
submitted for this year’s awards program. The
applications were evaluated by the Governmental
Accounting and Auditing Committee of the North
Carolina Association of Certified Public Accountants
(NCACPA). The awards are presented by a
representative of the Department and the NCACPA
during board meetings of the individual units.
The awards program benefits applicant units that
are recognized for their efforts and accomplishments.
Also, an exchange of ideas between local governments
occurs as a result of the publicity surrounding this
program. Application forms are sent electronically
annually to all local units of government.
State Treasurer’s Accounting/Financial
Management Awards Program for Nonprofit
Organizations — The Department established the
awards program for nonprofit organizations to
recognize the valuable work done by these
organizations for the citizens of the State.
Improvements in their accounting/financial
management systems allow them to provi de greater
benefits to our citizens. Entries for the year ended
December 31, 2001 were received from private
schools, private colleges and nonprofit hospitals.
Monitoring Compliance with New Economic
Development Laws — General Statute 158-7.1
requires municipalities and counties to report economic
development activities to the staff of the Local
Government Commission, and requires the
Commission to monitor their compliance within the
limits on economic development activities imposed by
the Statute. Municipalities and counties are required to
report these activities in their Annual Financial
Information Report. The staff then reviews the reports
to determine that units have complied with the Statute.
If it is discovered that a unit is in violation of the
requirements of that Statute, the municipality or county
must submit all appropriations and expenditures for
economic development activities to the Commission for
approval for the next three fiscal years.
Arbitrage Rebate Requirements for State
Bonds — In order to preserve the tax-exempt status of
the general obligation bond issues of the State that are
currently outstanding, the staff continues to perform
several tasks which are necessary to ensure
compliance with arbitrage regulations of the Internal
Revenue Service. The projects involve monitoring
investment yields, monitoring penalties in lieu of rebate
requirements, preparing monthly status reports on
each bond issue, and preparing information for use by
bond counsel and other outside professionals, who in
turn provide technical assistance to the staff.
Financial Reporting of Public School
Expenditures— Each year the staff prepares a report
for the General Assembly, the Department of Public
Instruction and other organizations on county funding
for public school capital outlays. This report is used in
analyzing the level of county spending for public
schools. In addition, the staff works with the
Department of Public Instruction on various accounting
issues to help ensure the proper accounting of current
expenses, capital outlay, and other issues.
Municipal Electric Systems — The staff, in
conjunction with the ElectriCities organization, has
been working with municipalities that operate electric
systems to help them identify ways to make their
electric rates more competitive with investor-owned
utilities. Because of